Types of Business Organisation

Question 1

Define

Limited liability

Answer 1

When the financial obligation of a firm’s owners in the event it fails is no more than the amount of capital they invested in the enterprise.

Question 2

Define

Unlimited liability

Answer 2

Total liability of a business owner or owners to repay all the debts of their business in the event it fails.

Question 3

What is fixed capital?

Answer 3

Money invested in long-lived man-made resources such as presmises, machinery and other equipment.

Question 4

What is working capital?

Answer 4

Money in a firm tied up in stocks of finished and unfinished products and used to pay day-to-day running costs.

Question 5

What is a sole trader or sole proprietor?

Answer 5

A business organisation owned and usually controlled by one person.

Question 6

What are the advantages of a sole trader?

Answer 6

1. Easy to set up
2. Very personal business
3. Full control over the business
4. Receive all the profits

Question 7

What are the disadvantages of a sole trader?

Answer 7

1. Unlimited liability
2. Full responsibility for managing the business
3. Lack of capital

Question 8

What is a partnership?

Answer 8

A legal agreement between two or more people, usually no more than 20, to jointly own, finance and run a business, and to share any profits.

Partnerships are popular among solicitors, doctors, accountants and veterinary surgeons.

Question 9

What different types of partners might you have in a partnership?

Answer 9

• General partners share unlimited liability
• Limited partners have limited liability
• Silent or sleeping partners provide money in return for a share of the profits, but are not involved in management

Question 10

What is a limited liability partnership (LLP)?

Answer 10

A partnership in which some or all the partners can have limited liability.

Laws governing may may vary between regions and countries.

Question 11

What are the advantages of partnerships?

Answer 11

1. Relatively easy to set up
2. Partners can bring new skills and ideas
3. Partners invest new capital to finance expansion

Question 12

What are the disadvantages of partnerships?

Answer 12

1. Partners can disagree
2. General partners have joint have joint unlimited liability
3. Lack of capital

Question 13

What is a limited company?

Answer 13

Limited companies (also known as joint-stock companies) sell stocks (shares) to raise capital, and is owned by the investors (shareholders) who have bought its stock.

Shareholders may receive dividends and elect a board of directors.

A person who owns more that 50% of the value of shares with have a controlling interest in that company, and can out vote all shareholders on company issues.

Question 14

What is a corporation?

Answer 14

A corporation is a separate legal body from its owners. In many countries, limited companies are corporations.

• all shareholders have limited liability
• the business can own assets, buy shares in other copmanies and borrow money in its own right
• the business can be taken to court and hekd responsible for any harm done as a result of the activities of the business
• the business can be taxed and must produce separate financial accounts

Question 15

What is a private limited company?

Answer 15

A business organisation able to raise permanent capital from the issue and sale of shares to private individuals. Shares cannot be transferred without the consent of other shareholders, and cannot be offered to the general public.

Question 16

What are the advantages of a private limited company?

Answer 16

1. Raise permanent capital
2. Shareholders have limited liability
3. Shareholders have no management responsibilities
4. Separate legal entity

Question 17

What are the disadvantages of a private limited company?

Answer 17

1. May be required to disclose financial information
2. Cannot sell shares publicly, must have agreement of other shareholders

Question 18

What is a public limited company?

Answer 18

A business organisation able to raise permanent capital from the sale of shares to the general public through a stock exchange or bourse.

Question 19

What are the advantages of a public limited company?

Answer 19

1. Can sell shares publicly
2. Can advertise shares

Question 20

What are the disadvantages of a public limited company?

Answer 20

1. Can be expensive to form
2. Legally required to publish detailed annual reports and accounts
3. Must hold AGMs
4. Management diseconomies
5. May be vulnerable to takeovers
6. Can be a divorce of onwership from control

Question 21

What is a multinational?

Answer 21

A business organisation with plant and operations in more than one country. It will usually have its headquarters based in its country origin.

Question 22

What are the advantages of being a multinational?

Answer 22

A multinational can:

• reach a huge global customer base and sell more
• avoid trade barriers by setting up operations in countries that apply tariffs and quotas to imports from businesses located overseas
• minimise transport costs locating plants across different countries to be near raw materials or large consumer markets
• minimise wage costs by locating operations in low-wage economies
• reduce average production costs by large-scale production
• raise significant capital for business expansion, R&D and to employ highly skilled labour

Question 23

What are the economic benefits of multinationals?

Answer 23

• Increased investment in new business premises, modern equipment and cutting edge technologies (this is called direct inward investment)
• Jobs and incomes provided for local workers
• New knowledge and skills that can help domestic firms improve productivity
• Taxes payed will boost government revenues
• Export earnings increased through international trade

Question 24

What are the economic costs of multinationals?

Answer 24

• Some multinationals may exploit workers in low-wage economies
• Natural resources can be exploited and the environment damaged
• Tax evasion
• Some multinationals may use their power to secure generous subsidies and tax breaks from a government
• Local competition may be forced out of business
• Some multinationals may interfere in government

Question 25

What are cooperatives?

Answer 25

Cooperatives are business organisations that are owned and controlled by a group of people to undertake an economic activity to their mutual benefit.

A cooperative provides benefits for its members.

Cooperatives operate a strict policy of one member, one vote.

Question 26

What are the types of cooperative?

Answer 26

Main types:

• Worker cooperatives: owned and controlled by workers
• Consumer cooperatives: owned and controlled by customers

Other types:

• Housing cooperatives
• Building cooperatives
• Utility cooperatives
• Farming cooperatives
• Credit unions and cooperative savings banks

Question 27

What are the advantages of worker cooperatives?

Answer 27

• Workers are in charge and everyone has equal say
• Workers are likely to work harder because they take part in decision making
• Workers receive the profits they make

Question 28

What are the disadvantages of worker cooperatives?

Answer 28

• Lack of capital
• Workers may have little business experience or entrepreneurial abilities

Question 29

What are the aims of public sector organisations?

Answer 29

Public sector organisations aim to deliver essential public services, some of which are free of charge. They aim to provide cost-effective public services that are funded from taxes paid by private sector businesses and individuals.

Question 30

What are the four main types of public sector organisation?

Answer 30

1. Central government authorities
2. Local government authorities
3. Government agencies
4. Public corporations

Question 31

What are some key features of public corporations?

Answer 31

• Run by a board of directors
• Government establishes policy and monitors board of directors
• Government minister can influence the choice of the board and chairperson
• Parliamentary select committees and consultative committees may be set up to monitor and investigate public corporations
• Separate legal enitity from board members and government
• Finance by government
• Profits may be used to improve services, finance other public services or reduce tax

Question 32

What are nationalised industries (state-owned industries)?

Answer 32

Industries in an economy owned and controlled entirely by the government.

Question 33

What is nationalisation?

Answer 33

The transfer of a private sector industry to the public sector.

Question 34

Why are some industries nationalised?

Answer 34

• to control large powerful firms
• to protect employment
• for national security (e.g. nuclear energy)
• industry considered too important
• to protect public services
• for political reasons