Types of business entities Details Flashcards
Features of the public sector
-Controlled and owned by the government
-Provides essential goods and services to citizens(e.g. healthcare, emergency services, etc.)
-Financed by the government through taxes and other public funds
-Answerable to the public for any actions taken
Features of the private sector
-Private ownership and control
-Profits can be earned by owners
-Little to no government involvement
-Largely privately funded
Role of the private sector(and its markets) on the economy
-creating employment
-helping the development and growth of the economy
-providing a wide variety of goods and services
Constituents of the private sector
-Sole traders
-Partnerships
-Privately held companies
-Publicly held companies
Features of sole trader businesses
-Sole trader owns and runs the business
-No legal distinction between sole trader and business
Advantages of sole traders
-All profits belong to the sole trader
-Complete control over important decisions
-Flexibility(in terms of working hours, changes to operations, etc.)
-Privacy(sole traders generally only need to declare their finances to authorities for tax)
-Minimal legal formalities
-Easy, inexpensive and quick to set up
-Close ties to customers(can give a competitive advantage)
Disadvantages of sole traders
-Unlimited liability
-Limited sources of finance(hard to obtain loans)
-High risk
-Workload and stress(potential ineffectiveness)
-Limited scope for expansion
-Lack of continuity(in the event of serious illness/death)
Features of partnerships
-Two or more individuals(partners) create and run the business
-Governed by partnership agreements
-Have unlimitied liability
-Ownership/control/profits are not always split equally
Potential aspects of a partnership agreement
-The amount of money put in by each partner
-The sharing of profits and losses by each partner
-The roles and responsibilities of each partner
-The rules around accepting new partners/withdrawal of exisiting partners
-The procedures for ending the partnership
Advantages of partnerships
-Easy to set up
-Minimal legal formalities
-Greater access to finance(more people to invest in the business)
-Greater efficiency/productivity
-Financial records remain private
Disadvantages of partnerships
-Unlimited liability
-Longer decision-making/potential for disagreement
-Legal and financial responsibility(mistakes made by one partner can reduce profits for all partners)
-Lack of continuity
What happens if an individual dies while still in a partnership?
The deed of partnership(legal agreement) becomes invalid and will usually have to be made again(depending on the laws of the country)
Features of companies
-Owned by shareholders
-Are incorporated businesses(are registered with a state so they become legal entities separate from their shareholders)
-Shareholders have limited liability
Why is limited liability a benefit for shareholders
It means that they cannot lose more than the funds that they invested in the business in the event that the business incurs losses)
RIghts of shareholders of companies
-vote at the Annual General meeting(where decisions are made regarding the management of the company)
-receive a part of the company’s profits in the form of dividends if these are paid
Types of limited liability companies(corporations)
-privately held companies
-publicly held companies
Features of privately held companies
-Are privately owned
-Shares are not sold to the wider public/traded on a stock exchange(without prior approval from all shareholders)
-Shareholders have limited liability
-Financial records are kept private
Why would a privately held company not want to sell their shares to the wider public?
That way, they retain the ability to make decisions about the company and prevent hostile takeovers
Documents required for privately held companies
-the Memorandum of Association(states the details of the company)
-the Articles of Association(states the internal roles and responsibilities of the board of directors and shareholders)
Advantages of privately held companies
-Control and ownership
-Greater access to finances
-Limited liability
-Financial records are kept private
Disadvantages of privately held companies
-Profits shared between several shareholders
-Lengthier decision-making
-Shares cannot be traded publicly to raise finances
-Privacy(businesses cannot be examined by external experts to receive advice)
-Expensive to start up and maintain
How are shareholders usually represented in privately held companies?
They are represented by the board of directors(who are generally elected to run a company on behalf of them)
Features of publicly held companies
-Business must publish financial accounts to the public
-Shareholders have limited liability
-Can be taken over by other companies(if they buy a large enough share of the company)
-Shares are sold to the wider public/traded on a stock exchange
-Is publicly owned(by shareholders)
Purpose of initial public offerings(IPOs)
Turn the business into a publicly held company(public limited company)
Documents required for publicly held companies
-the Memorandum of Association(states the details of the company)
-the Articles of Association(states the internal roles and responsibilities of the board of directors and shareholders)
What is the licence that makes a company:
-recognisied as a separate legal entity
-capable of trading stocks
A certificate of incorporation
What do shareholders of publicly held companies do?
They attend an Annual General Meeting to:
-vote for and elect the board of directors
-learn about the performance of the business from the CEO
-evaluate the performance of the financial year
Advantages of publicly held companies
-Money can be raised through selling shares to the public
-Risks shared among numerous shareholders
-Separate legal identity(business continues operating even if a stakeholder dies)
-Shareholders have limited liability
Disadvantages of publicly held companies
-Profits are shared between many shareholders
-Expensive/time-consuming to set up/maintain
-Loss of control
-Financial accounts are publicly available to be viewed
Types of for-profit social enterprises
-Cooperatives
-Private sector for-profit social enterprises
-Public sector for-profit social enterprises
Features of cooperatives
-Owned by its members
-Members use demographic governance to run the business
-Have limited liability
Industries in which cooperatives are commonly found
-Agriculture
-Housing
-Utilities
-Wholesale and retail trade
-Heathcare
-Education
-Banking
Cooperatives can be owned by….
-Producers
-Workers
-Consumers
-Residents, etc.
Benefits of cooperatives
-Make a positive impact on the planet(through their core work)
-More economically sustainable than non-profit social enterprises
-Attract increasing number of customers, investors and employees(who value sustainable businesses)
Drawbacks of cooperatives
-Potential issues with funding
-Issues with credibility
-Harder to remain true to purpose if business grows
-Difficulty ensuring supply chains are aligned with business’ values
-Difficulties measuring social or environmental impact
Features of non-profit social enterprises
-Aims to improve social or environmental outcomes
-May receive funding from grants and donations
-May be involved in revenue-generating activities(e.g. selling goods/services)
-Any surplus required by law to be reinvested into business
-Have limited liability
-Pay no tax on surplus
-May rely on volunteers for help
Benefits of non-profit social enterprises
-Have limited liability
-Pay no tax on surplus
-May be able to rely on volunteers for help
-May receive grants or donations
Drawbacks of non-profit social enterprises
-Issues with funding(less involved in market-based activities)
-Hard to recruit and maintain talent(due to generally low salaries)
-Significant amount of paperwork needed to set up
