What is a business? - 1.2 Flashcards
Why do businesses change different forms?
Mainly growth. As a sole trader grows they may decide they need access to more capital and protection of limited liability. Accessing more capital and achieving a higher profile may result in companies going public.
Why do businesses choose different forms?
Based on what type of liability they want, funding needs or management style.
What is a sole trader?
Individuals establishing and operating a business on their own. Sole traders work for themselves.
What are the advantages of operating as a sole trader?
- Easy to start up
- Freedom to make own decisions
- Profits are not shared
What are the disadvantages of operating as a sole trader?
- Pressure of responsibility
- Raising finance to set up and expand
- Unlimited liability so responsible for any losses
What is a private limited company (LTD)?
Owned by shareholders although LTDs can place restrictions on who shares are sold to.
What are the advantages of an LTD?
- Cheap to set up
- Limited liability
- Sell shares privately
What are the disadvantages of an LTD?
- Regulations and laws which can be time consuming and costly
- File certain information with government which reduces privacy for owners
What is a public limited company (PLC)?
Company which sells shares through the stock exchange. Raising large sums of capital. Often in the media due to size and importance. Generating free and low-cost publicity
What are the advantages of a PLC?
- Limited liability
- Easier to secure funding through shareholders
- Credibility enhances with customers, suppliers and potential investors
What are the disadvantages of a PLC?
- Regulations and laws which are time consuming and costly
- Loss of control as shareholders influence decisions
- Market fluctuations can change share prices which may not reflect company’s true performance
What is a public sector business?
Businesses owned by national or local government. Examples include airports, NHS, leisure centres.
What is a private sector business?
Owned by shareholders or individuals. Most businesses are private sectors.
What is a not-for-profit business?
Business set up with a different objective from profit. Social enterprises aim to benefit the community or society in general.
What are the advantages of a not-for-profit organisation?
-Tax exemptions allow businesses to operate without paying taxes
- Community support as they work towards social causes
What are the disadvantages for a not-for-profit organisation?
-Funding limitations as donations are unpredictable
- Comply with regulations which are time consuming
What is limited liability?
Protection of owners assets and shareholders. Owners are responsible for company’s debt up to the amount they invested.
What is unlimited liability?
Individual or group is responsible for actions of the business. Could loose personal assets if the business has financial problems.
What is ordinary share capital?
Funds raised through ordinary shares
Calculating ordinary share capital:
Ordinary share (capital= number of ordinary shares issues X nominal value per share (Minimum price at which shares can be issued)
What is market capitalisation?
Total value of the issued shares of a public limited company. Can be used to measure the size of a PLC
How to calculate market capitalisation?
Market capitalisation= total number of outstanding shares (shares currently held by shareholders) X current market price per share
What are dividends?
Share in the profits of a company that are distributed to shareholders. Shareholders receive a specific amount for each share they own.
What are the influences on share prices?
Company’s performance means share prices can be raised. Business environment such as economic climate may worry investors so demand for share prices fall.
What is the significance of share price changes?
A rise in share prices shows the management team is doing well and may receive a bonus. A fall in share prices shows there is poor performance from management team and makes the company vulnerable to a takeover. Although these changes don’t have a direct impact on the company’s immediate financial position.
What is the role of shareholders?
Influence decision making of companies. Each share is worth one vote. They receive an annual report which reviews performance over the last year.
Why do shareholders invest?
May benefit from increase in share prices and receiving dividends. Or to make a quick return.
What are the effects of ownership on mission?
For example Co-op works towards creating a better, fairer world and enhance the lives of colleagues, customers and communities. This means the business operates in a way to benefit stakeholders and not seeking to maximise profits.
What are the effects of ownership on objectives?
For example, Co-op may operate with objectives that relate to its impact on stakeholders and the community.
What are the effects of ownership on decisions?
Impacts complexity of decisions and speed of decision making.
What are the effects of ownership on performance?
Larger organisations may be able to produce at lower costs due to specialised employees. Public companies may be more innovative as they can spend large sums on research.
