Types of business organisation (Chapter 4).

Question 1

There are six main forms of business organisation of the private sector. These are:

Answer 1

There are several main forms of business organisation of the private sector. These are:

• Sole traders.
• Partnerships.
• Private limited companies.
• Public limited companies.
• Franchises.
• Joint ventures.

Question 2

What is a sole trader?

Answer 2

Sole trader is a business owned by one person.

Question 3

Why is a sole trader business a common form of organization?

Answer 3

One of the reasons it is such a common form of organisation is because there are so few legal requirements to set it up.

Question 4

There are only a few legal regulations which must be followed for sole trader business: Name them

Answer 4

There are only a few legal regulations that must be followed for sole trader business:

• The owner must register with, and send annual accounts to, the Government Tax Office.
• The name of the business is significant and must be registered with the Registrar of Business Names.
• The sole trader must observe laws that apply to all businesses in that industry.

Question 5

Name the 6 benefits of being a sole trader.

Answer 5

• There are few legal regulations to worry about when the business is set up.
• You can be your own boss.
• You have the freedom to choose your own holidays, hours of work, prices to be charged, and whom to employ.
• Close contact with your own customers.
• You have an incentive to work hard because you are able to keep all of the profits.
• You do not have to give information about your business to anyone else.

Question 6

Define limited liability.

Answer 6

Limited liability means that the liability of shareholders in a company is limited to only the amount they invested.

Question 7

Define unlimited liability.

Answer 7

Unlimited liability means that the owners of a business can be held responsible for the debts of the business they own.

Question 8

Name the 6 disadvantages of being a sole trader.

Answer 8

• You have no one to discuss business matters with.
• You are fully responsible for any debts that the business may have.
• The sources of finance for a sole trader are limited to the owner’s savings, profits made by the business, and small bank loans.
• The business will not benefit from economies of scale.
• The business is likely to remain small because capital for expansion is so restricted.
• If you are ill there is no one who will take control of the business for you and there is no continuity of the business after the death of the owner.

Question 9

Who do you recommend a sole trader structure to (3)?

Answer 9

• Someone setting up a new business.
• Do not need much capital to get the business going.
• Will be dealing mainly with the public, for example, hairdressing - personal and direct contact between the customer and the owner is often very important for the success of these businesses.

Question 10

What is a partnership?

Answer 10

Partnership is a form of business in which two or more people agree to jointly own a business.

Question 11

What is a partnership agreement?

Answer 11

A partnership agreement is a written and legal agreement between business partners.

Question 12

Why is it recommended to have a partnership agreement or a deed of partnership?

Answer 12

Without this document, partners may disagree on who put most capital into the business or who is entitled to more of the profits. A written agreement will settle these matters.

Question 13

Partnerships can be set up very easily. Name one way you can set a partnership.

Answer 13

You could ask someone you know to become your partner in your business and this is called verbal agreement.

Question 14

What 5 things does a partnership agreement contain?

Answer 14

• The amount of capital invested in the business by each partner.
• The tasks to be undertaken by each partner.
• The way in which the profits would be shared out.
• How long the partnership would last.
• Arrangements for absence, retirement, and how new partners could be admitted.

Question 15

What are the 4 advantages of partnership?

Answer 15

• More capital could now be invested into the business.
• The responsibilities of running the business were now shared.
• Both partners were motivated to work hard because they would both benefit from the profits.
• Any losses made by the business would now be shared by the partners.

Question 16

What is an unincorporated business?

Answer 16

An unincorporated business is one that does not have a separate legal identity. Sole traders are partnerships are unincorporated businesses.

Question 17

What are the 5 disadvantages of a partnership?

Answer 17

• The partners did not have limited liability.
• The business did not have a separate legal identity.
• Partners can disagree on business decisions and consulting all partners takes time.
• If one of the partners is very inefficient or actually dishonest, then the other partners could suffer by losing money in the business.
• Most countries limit the number of partners meaning that the business growth would be limited by the amount of capital people could invest.

Question 18

Partnerships are very suitable in certain situations, such as:

Answer 18

Partnerships are very suitable in certain situations, such as:

• When people wished to form a business with others but wanted to avoid legal complications.
• Where the professional body, only allowed professional people to form a partnership, not a company.
• Where the partners are well known to each other, possibly in the same family, and want a simple means of involving several of them in the running of the business.

Question 19

What is a Limited Liability Partnership (LLP)?

Answer 19

It offers partners limited liability but shares in such businesses cannot be bought and sold.

This type of partnership is a separate legal unit that still exists after a partner’s death.

Question 20

Define Incorporated businesses.

Answer 20

Incorporated businesses are companies that have separate legal status from their owners.

Question 21

Define shareholders.

Answer 21

Shareholders are the owners of a limited company. They buy shares which represent part-ownership of the company.

Question 22

Define private limited companies.

Answer 22

Private limited companies are businesses owned by shareholders but they cannot sell shares to the public.

Question 23

A company is a separate legal unit from its owners - it is an incorporated business. This means 3 things:

Answer 23

A company is a separate legal unit from its owners - it is an incorporated business. This means that:

• A company exists separately from the owners and will continue to exist if one of the owners should die.
• A company can make contacts or legal agreements.
• Company accounts are kept separate from the accounts of the owners.

Question 24

What are the 4 advantages of private limited companies?

Answer 24

• Shares can be sold to a large number of people (friends and relatives).
• Limited liability for shareholders.
• Separate legal identity.
• The people who started the company are able to keep control of it as long as they do not sell too many shares to other people.

Question 25

Shares of a private limited company can be sold to large numbers of people. Why would this be a benefit?

Answer 25

The sale of shares could lead to much larger sums of capital to invest in the business than the two original partners could manage to raise themselves meaning the business could therefore expand more rapidly.

Question 26

Limited liability for shareholders of private limited companies. Why would this be considered a benefit?

Answer 26

It means that if the company failed with debts owing to creditors, the shareholders could not be forced to sell their possessions to pay the debts, the shareholders could only lose their original investment in the shares.

Question 27

Why does limited liability encourage people to buy shares?

Answer 27

Limited liability encourages people to buy shares, knowing that the amount they pay is the maximum they could lose if the business is unsuccessful.

Question 28

What are the 4 disadvantages of private limited companies?

Answer 28

• Not easy to transfer shares.
• Legal formalities.
• Accounts are available for the public to see.
• Cannot sell shares to the public.

Question 29

• There are significant legal matters which have to be dealt with before the company can be formed. In particular, two important forms or documents have to be sent to the Registrar of Companies: Name them.

Answer 29

• The Articles of Association - this contains the rules under which the company will be managed.
• The Memorandum of Association - This contains very important information about the company and the directors.

Question 30

What are the documents from Private Limited Companies intended for?

Answer 30

• Companies are correctly run.
• Purpose and structure of the company.

Question 31

The shares in a private limited company cannot be sold or transferred to anyone else without the agreement of the other shareholders. What is the disadvantage of this rule?

Answer 31

This rule can make some people reluctant to invest in such a company because they may not be able to sell their shares quickly if they require their investment back.

Question 32

Most importantly for rapidly expanding businesses, the company cannot offer its shares to the general public. What is the disadvantage of this?

Answer 32

Therefore it will not be possible to raise really large sums of capital to invest back into the business.

Question 33

Private Limited Companies were very suitable in certain situations, such as:

Answer 33

It was a very common form of organization for family businesses or partnerships when the owners wished to expand them further and wanted to reduce the risk to their own capital.

Question 34

Define public limited companies.

Answer 34

Public limited companies are businesses owned by shareholders but they can sell shares to the public and their shares are tradeable on the Stock Exchange.

Question 35

What is one thing you should remember for public limited companies?

Answer 35

• Public limited companies are not in the public sector of industry. They are not owned by the government but by private individuals and as a result, they are in the private sector.

Question 36

What are the five advantages of public limited companies?

Answer 36

• This form of business organization still offers limited liability to shareholders.
• It is an incorporated business and has a separate legal identity to the owners or shareholders.
• There is now the opportunity to raise very large capital sums to invest in the business.
• There is no restriction on the buying, selling, or transfer of shares.
• A business trading as a public limited company usually has high status and should find it easier to attract suppliers prepared to sell goods on credit and banks willing to lend to it than other types of businesses.

Question 37

It is an incorporated business and has a separate legal identity to the owners or shareholders. Expand further on this point.

Answer 37

Its accounts are kept separate from those of the owners and there is no continuity should one of the shareholders die.

Question 38

There is now the opportunity to raise very large capital sums to invest in the business. Why?

Answer 38

There is no limit to the number of shareholders a public limited company can have.

Question 39

What are the four disadvantages of a public limited company?

Answer 39

• The legal formalities of forming such a company are quite complicated and time-consuming.
• There are many more regulations and controls over public limited companies in order to try to protect the interest of the shareholders.
• Selling shares to the public is expensive.
• There is the very real danger that although the original owners of the business might become rich by selling shares in their business, they may lose control over it when it ‘goes public’.

Question 40

There are many more regulations and controls over public limited companies in order to try to protect the interest of the shareholders. Give an example.

Answer 40

These include the publication of accounts, which anyone can ask to see.

Question 41

What is an Annual General Meeting (AGM)?

Answer 41

An Annual General Meeting is a legal requirement for all companies. Shareholders may attend and vote on who they want to be on the Board of Directors for the coming year.

Question 42

State the ‘equation’ for an AGM regarding ownership and control.

Answer 42

shareholders (Ownership) ➡ may attend the AGM (few do).
↓
Vote for Board of Directors who take all important decisions (control).
↓
appoint managers for day-to-day business decisions (control).

Question 43

What is called the divorce between ownership and control?

Answer 43

The shareholders own, but the directors and managers control.

Question 44

Define dividends.

Answer 44

Dividends are payments made to shareholders from the profits (after tax) of a company. They are the return to shareholders for investing in the company.

Question 45

Two types of private sector business organisations exist: Name them.

Answer 45

A franchise and a joint venture.

Question 46

What is a franchise?

Answer 46

A franchise is a business based up the use of brand names, promotional logos and trading methods of an existing successful business.

Question 47

What is a franchisor and what does a franchisee do?

Answer 47

The franchisor is a business with a product or service that it does not want to sell to consumers directly. Instead, it appoints franchisees to use the idea or product and to sell it to consumers.

Question 48

What are the four advantages to the franchisor.

Answer 48

• The franchisee buys a license from the franchisor to use the brand name.
• The management of the outlets is the responsibility of the franchisees.
• All products sold must be obtained from the franchisor.
• Expansion of the franchised business is much faster than if the franchisor had to finance all new outlets.

Question 49

What are three disadvantages to the franchisor?

Answer 49

• Poor management of one franchised outlet could lead to a bad reputation for the whole business.
• The franchisee keeps profits from the outlet.

Question 50

What are the three disadvantages to the franchisee?

Answer 50

• Less independence than with operating a non-franchised business.
• Licence fee must be paid to the franchisor and possibly a percentage of the annual turnover.
• May be unable to make decisions that would suit the local area.

Question 51

What are the six advantages to the franchisee?

Answer 51

• The franchisor pays for advertising.
• All supplies are obtained from the franchisor.
• Training for staff and management is provided by the franchisor.
• Banks are often willing to lend to franchisees due to relatively low risk.
• The chances of business failure are much reduced because a well-known product is being sold.
• There are fewer decisions to make than with an independent business - prices, store layout, range of products will have been decided by the franchisor.

Question 52

What is a joint venture?

Answer 52

A joint venture is where two or more businesses start a new project together sharing capital, risks and profits.

Question 53

What are the three advantages of a joint venture?

Answer 53

• Sharing of costs.
• Risks are shared.
• Local knowledge when joint venture company is already based in the country.

Question 54

What are the three disadvantages of a joint venture?

Answer 54

• Disagreements over important decisions might occur.
• If the new project is successful, then the profits have to be shared with the joint venture partner.
• The two joint venture partners might have different ways of running a business - different cultures.

Question 55

Define the public sector.

Answer 55

The public sector includes all businesses owned by the government/state and local government and public services such as hospitals, fire services, and government departments.

Question 56

What is a public corporation?

Answer 56

A public corporation is a business in the public sector that is owned and controlled by the state/government.

Question 57

What is nationalization?

Answer 57

This means that the businesses were once owned by private individuals, but were purchased by the government (for examples water supply and rail services).

Question 58

What are the four advantages of public corporations?

Answer 58

• Some industries are considered so important that government ownership is thought to be essential (water supply and electricity generation).
• If industries are controlled by monopolies because it would be wasteful to have competitors then these natural monopolies are often owned by the government.
• If an important business is failing and likely to collapse, the government can step in to nationalize it, keeping the business open and securing jobs.
• Important public services, such as TV and radio broadcasting, are often in the public sector. Non-profitable but important programs can still be made available to the public.

Question 59

What are the four disadvantages of public corporations?

Answer 59

• There are no private shareholders to insist on high profits and efficiency.
• Governments can use these businesses for political reasons and this prevents the public corporations from being operated like other profit-making businesses.
• Often there is no close competition to the public corporations.
• Governments’ subsidies can lead to inefficiency as managers will always think that the government will help them if the business makes a loss.

Question 60

Often there is no close competition to the public corporations. There is therefore _.

Answer 60

There is therefore a lack of incentive to increase consumer choice, increase efficiency or even improve customer service.

Question 61

Local governments and municipalities usually operate some trading activities. Who are these paid by and give two examples?

Answer 61

Some of these services are free to the user and paid for out of local taxes, such as street lighting and school.

Question 62

Other services are chared for and expected to break even at least.

Answer 62

These might include street markets, swimming pools, and theatres.