Understanding Different Business Forms

Question 1

What are Sole Traders?
Pros?
Cons?
Extra?

Answer 1

Sole Traders: a business owned and run by one person, with an limited liability.
Pros: full control, keep all profits
Cons: unlimited liability, limited capital
Extra: decisions are made on your own, easy to set up, all profits are your own. No legal protection, entirely your responsibility, must cover all aspects of the business

Question 2

What are Partnerships?
Pros?
Cons?
Extra?

Answer 2

Partnerships: a business owned by two or more people who share profits and responsibility
Pros: shared capital and skills
Cons: unlimited liability, potential conflicts
Extra: knowledge can be shared (+ skills + workload), may be easier to raise capital, holiday and sickness cover. Disagreements, normal partnerships have no legal protection, all partners need to be involved in decisions, profits and debts need to be shared.

Question 3

What are Private Limited Companies (Ltd)?
Pros?
Cons?

Answer 3

Private Limited Companies (Ltd): a company owned by shareholders with limited liability. Shares not publicly traded.
Pros: limited liability, easier to raise capital
Cons: more regulatory requirements

Question 4

What are Public Limited Companies (PLC)?
Pros?
Cons?

Answer 4

Public Limited Companies (PLC): a company whose shares are traded publicly on a stock exchange
Pros: can raise large amounts of capital, limited liability
Cons: subject to more regulations, risk of hostile takeovers

Question 5

What must Private Limited Companies and Public Limited Companies be?

Answer 5

Private Limited Companies and Public Limited Companies must be registered before running

Question 6

Who are shareholders in Private Limited Companies and Public Limited Companies?

Answer 6

In Private Limited Companies and Public Limited Companies all owners are shareholders.

Question 7

Who will select the managing directors in Private Limited Companies and Public Limited Companies?

Answer 7

Owners will elect a managing director.

Question 8

What need to be created in Private Limited Companies and Public Limited Companies?

Answer 8

Annual reports need to be created.

Question 9

How do shareholders get shares in Private Limited Companies and Public Limited Companies?

Answer 9

Shareholders put money into the business in exchange for shares in the company.

Question 10

Information about Private Limited Business:

Answer 10

• the business is owned by a director/s who can sell shares inn the
  company to individuals of their choice
• shares can only be brought after permission has been given byy the
  director/s
• shares can be sold for me
• limited liability
• only taxed on profits

Question 11

Who owns a private sector?

Answer 11

A private sector is owned by private individuals or businesses (e.g. supermarkets, tech companies)

Question 12

Who owns a public sector?

Answer 12

A public sector is owned by the government (e.g. NHS, public transport services )

Question 13

What are Non-Profit Organisations?

Answer 13

Non-Profit Organisations are organisations that aim to achieve social objectives rather than profit (e.g. profits)

Question 14

What are Social Enterprises?

Answer 14

Social Enterprises are businesses that trade for a social or environmental purpose.

Question 15

Information about Unlimited Liability:

Answer 15

Owners are personally responsible for the debts of the business, owners share responsibility equally, owners have responsibility for debts and claims against the business, more risk involved, personal possessions are at risk

Question 16

Information about Limited Liability:

Answer 16

Owners are only liable for the money they invested, directors are legally responsible, shareholders only risk losing their investments, business operates as a separate financial entity to shareholders, personal possessions are protected

Question 17

Who are Government Departments operated by?

Answer 17

Government Departments are operated by the government but staffed by civil servants (Department for Education)

Question 18

Who are Government Agencies run by?

Answer 18

Government Agencies are independently run but must stick to government guidelines (Child Protection agency)

Question 19

What are Worker Co-operations?

Answer 19

Worker Co-operations are businesses that are owned by the people that work for it (John Lewis)

Question 20

What are Charity Trusts?

Answer 20

Charity Trusts must register as a charity and produce annual accounts. Will still be set up as a business with a manager.

Question 21

More info about PLC:

Answer 21

• must have at least 2 shareholders and £50,000 worth of shares to
  sell
• shares are sold and bought on the stock exchange
• large amounts of money can be made very quickly
• the original directors can lose control of the business

Question 22

What is Market Capitalisation?

Answer 22

Market Capitalisation is the total values of the issued ordinary shares of a public limited company.

Question 23

How is Market Capitalisation calculated?

Answer 23

Current Market Price X Number of Ordinary Shares Issued

Question 24

What is Market Capitalisation often used as?

Answer 24

Market Capitalisation is often used as an indication of the company’s overall value.

Question 25

What does the value of ordinary share capital use?

Answer 25

The value of ordinary share capital uses the prices of shares at the time they were first issued - i.e. the price the first investors paid (not the current market price)

Question 26

What are shareholders and what do they own?

Answer 26

Shareholders are the owner of a limited company; any person, company or other institution that owns at least one share in a company.

Question 27

Shareholder difference in small business and public limited companies.

Answer 27

A small business may have only one while a public limited company may have thousands.

Question 28

Role of Shareholders: what do shareholder invest in for return?

Answer 28

Shareholders invest in companies for return for a share of the profits (dividends)

Question 29

Role of Shareholders: how and what do shareholders influence?

Answer 29

Shareholders influence on decision making through voting rights

Question 30

Reasons why shareholders invest?

Answer 30

1. financial support a business and be involved in the running of it.. Shareholders in Private Limited Companies for example.
2. to gain control of a business - by buying 51% of the shares (if shares are traded on stock exchange)
3. to obtain a share if the profit if a dividend is issued.
4. to benefit from ‘capital gain’ i.e. to profit from a higher share price at a later date

Question 31

What are the effects of ownership on mission and objectives?

Answer 31

• ownership structure influences business goals (e.g. profit vs social objectives)
• impact on strategic direction and stakeholder priorities

Question 32

How does the state of economy impact the value of shares?

Answer 32

The state of economy can impact the value of shares because when the economy is doing well, companies will make more profits leading to an increase in share prices. Conversely during economic downturns, companies may struggle leading to lower profits and decreased share values. Many factors like inflation or unemployment rates will play a role in the state of the economy which affects share prices.

Question 33

What are the factors that affect the choice of business form or legal structure in the private sector?

Answer 33

• the need for finance in order the expand
• the size of the business and the level and type of investment required
• the need for limited liability
• the degree of control desired by the owners
• the nature of the business and its objectives
• the level of risk involved

Question 34

What are non-profit organisations?

Answer 34

Non-profit organisations are organisations that don’t have a defined structure and they take many forms. Often referred to as the ‘third sector’.

Question 35

What are common characteristics in non-profit organisations?

Answer 35

• they have a governing body responsible for managing their affairs
• they are usually established for purposes other than financial gain (profits are reinvested)
• these organisations may make a profit, but their objective isn’t to maximise profit for shareholders/ owners

Question 36

What don’t share prices reflect?

Answer 36

Shares prices don’t reflect the profitability . Market capitalisation may be impressive but the company may never have actually made a profit at all. Many internet business saw this happen during the ‘dot.com bubble’ which was a rapid rise in the U.S technology stock equity valuations fuelled by investments in internet-based companies during the late 1990s.