understanding business forms

Question 1

What is the primary sector?

Answer 1

Businesses that are concerned with extraction of raw materials e.g agriculture, forestry, fishing, oil

Question 2

What is the secondary sector?

Answer 2

The involves taking the raw materials from the primary sector and manufacturing it into a product or service e.g construction, car plant

Question 3

What is the tertiary sector?

Answer 3

Also known as the service sector and includes retail, education, banking, police

Question 4

What is the public sector?

Answer 4

Made up of organisations that are owned and controlled by the government on behalf of the public e.g NHS, schools/colleges, armed forces, local + central gov

Question 5

What is the private sector?

Answer 5

Any business that operates within the private sector are owned by individuals or group of entrepeneurs or shareholders

Question 6

What is a sole trader?

Answer 6

-An individual who owns and controls their own business
-Legally required to keep a record of all income and expenses and pay income tax
-Unlimited liability- fully responsible for all debts, if unable to pay debts their assets may be taken

Question 7

What are benefits of a sole trader?

Answer 7

-cheap and easy to set up
-get to keep all profits
-autonomy in decision making
-financial records remain private
-motivation is high as success of the individual and the business are one and the same
-can choose all working hours and holidays

Question 8

What are challenges of a sole trader?

Answer 8

-difficult to take time off to get cover
-stress as no one to collaborate with
-unlimited liability
-limited capital for investment
-little specialist skills

Question 9

What are limited companies?

Answer 9

-exist in their own right
-owners and the company have separate legal entities therefore the company’s finances are separated from the owners personal finances
-shareholders are the owners of limited companies
-limited liability ( not responsible for company’s debts)
-they can only lose the money they have invested

Question 10

What are advantages of private limited companies? (LTDs)

Answer 10

-limited liability
-separate legal identity
-more flexible than a plc
-financial records remain relatively private
-more capital can be raised through the sale of shares ( only friends/family)

Question 10

What are disadvantages of LTDs?

Answer 10

-more complex to set up due to increased legal requirements
-some loss of control as shareholders have voting rights
-unable to sell shares to the public

Question 11

What are advantages of public limited companies? (PLCs)

Answer 11

-limited liability ( important in attracting shareholders)
-separate legal identity
-more capital can be raised through the sale of shares
-often get free positive publicity

Question 12

What are disadvantages of PLCs?

Answer 12

-lack of privacy as financial performance is available for all to view
-more complex to set up due to increased legal requirements and ongoing administrative costs
-some loss of control as shareholders have voting rights
-risk of a hostile takeover (if someone buys 51% or more of the shares they can take over)

Question 13

Why will an LTD often change to a PLC?

Answer 13

-growth/ expansion which is done by selling shares to the public, becoming better known and access to more capital from other investors
-however, risk of a hostile takeover and giving up control over decision making and the business

Question 14

What is Incorporation?

Answer 14

-companies must be registered (incorporated) at Companies House
-companies must send to the Registrar of Companies the following: 1. A memorandum of Association- home, registered office and what the company will do
2. Articles of association-the rules for running the company
3. Form 10- details of directors and company secretary
4. Form 12- declaring that they comply with company law
Companies must deliver to Companies House each year a true and fair set of accounts along with an annual return.

Question 15

what is the role of investors?

Answer 15

-they are investors who are part owners of a company
-their liabi;lity is limited to the amount invested or promised
-they receive dividends in return for investment
-invited to an AGM where they have a proportional voting right
-individual members of the public only make up 15% of shareholders in the uk, while the remaining 85% are owned by other big companies such as banks and insurance companies

Question 16

why do shareholders invest?

Answer 16

-short term gains i.e receipt of dividends
-long term gains i.e increase in share price

Question 17

influences on share price

Answer 17

-global economy (whats happening elsewhere)
-investor confidence
-political stability (if politics is stable)
-company performance (how well the company is performing)
-national economy (not well- more unemployment so less people will invest)

Question 18

significance of share price changes

Answer 18

-indication of managers performance
-influences stakeholders inc employees suppliers and consumers perceptions of business performance
-can effect ability to raise finance from other sources
-will be watched carefully by competitors and other businesses
-may flag an opportunity for a hostile takeover
-affects consumer confidence in the economy as a whole

Question 19

what is market capitalisation?

Answer 19

-measures the size of a PLC through market capitalisation
-this s the total value of issued shares of a PLC

Question 20

what is the formula for market capitalisation?

Answer 20

current share price x number of shares issued

Question 21

what are the effects of ownership on business?

Answer 21

-the type of business ownership to a large extent will dictate how the business will operate
-this includes:
its objectives
its profits and profitability
growth potential
overall performance