Y10 Business Mocks Flashcards

Question

What is limited liability?

Answer 1

Within limited companies, shareholders are not responsible for the company's debts. Shareholders may only lose the money they have invested in the company to help pay off any outstanding debts or liabilities. This means that the liability of shareholders is limited to the value of their investment into the company’s shares.

Answer 2

• Private limited companies (ltd) can raise funds from investors, such as friends and family, but not from the general public, as its shares are not listed on the stock exchange. • There are many examples of ltd companies. Well known ltd companies include River Island, Clarks and Dyson.

Answer 3

Benefits • Limited liability - protects the personal wealth of the shareholders • Easier to raise finance as the company can sell shares • Stable form of structure – the company continues to exist even when the shareholders change • Original owners are likely to retain control Drawbacks • Shareholders have to agree about how profits are distributed • Greater administrative costs than setting up as a sole trader or partnership • Shareholders must be invited which limits the amount of finance that can be raised through share capital • Less privacy - public disclosure of company information, but not as extreme as for a plc • Directors’ legal duties are stricter

Answer 4

• Most of the largest businesses in a country will be public limited companies (plc). • Famous examples of public limited companies in the UK include BP, M&S, Tesco and Barclays. • Public limited companies (plcs) are complicated and expensive to set up, but this type of company can raise large sums of money through listing its shares on the stock exchange. • The trading of shares this way can make the company vulnerable to a possible takeover. This could mean that the original owners / shareholders of the company lose control, if they end up holding less than 50% of the shares.

Answer 5

Advantages • Limited liability – protects the personal wealth of the shareholders • Can raise a large amount of funds via the stock exchange. This finance is permanently invested and therefore does not need to be paid back • Stable form of structure – business continues to exist even when shareholders change • Firm ‘seen as’ more prestigious than a Ltd Disadvantages • Shareholders may not agree with how the profits have been distributed by the board of directors • Flotation on the stock market is costly • Greater administrative costs to set up and run • Finance limited to the stock market valuation of the business • Public can see company information and accounts • Risk of company being taken over • Separation of ownership and control

Answer 6

Size of business – start-up businesses often start as sole traders or partnerships, as they are easier and quicker to set up compared to a Ltd. Type of business – if specific expertise is involved, such as with doctors or lawyers, the legal structure chosen is more likely to be a partnership rather than a sole trader. If significant risk is involved, an Ltd is more likely. Lender requirements – the bank may prefer the business to be set up as a sole trader or partnership, as it will have more of a guarantee that the business owners will pay back any loan if it fails. Investment protection – a limited company may be chosen so investors can be protected by limited liability. Control – the owner, as a sole trader, or a shareholder, holding the majority of shares in a company, has total control of the business. Growth – becoming a plc allows a large amount of finance to be raised.

Answer 7

• These include community and other voluntary organisations, as well as social enterprises and charities. • Not-for-profit organisations are set up to achieve objectives other than profit. Whilst funds will need to be raised, any surplus money made will be used to help meet the organisation’s aims and objectives. • To be classed as a social enterprise, at least 50% of the organisation’s surplus money made must be reinvested back into the enterprise or into activities to help satisfy the social need that the social enterprise is attempting to meet.

Answer 8

Aim: • States the overall purpose for the business, the long term goal Mission statement: • General description of the overall aims of the business – what the business stands for / why it exists; can be just one sentence! Objectives: • Specific, measurable targets to help meet the aims of the business

Answer 9

Survival – Often entrepreneurs discover their idea was not as good as they originally thought or the external business environment makes it hard to trade, which means the business finds it difficult to run profitably. Profit maximisation – profit is the main objective for most businesses. This is the reward to the entrepreneur for their hard work and the risks that they have undertaken. Market share / sales maximisation – some businesses will be more concerned with increasing market share or becoming the market leader. Growth – not all businesses want to grow, but most do. This means that they can increase their profits and the value of the business, through expanding within the home market or internationally. Social / ethical responsibilities – increasingly businesses are aware of their responsibilities to the society in which they operate. These may be related to the environment or having correct “ethical” behaviour i.e. doing the right thing regardless of cost / profit! Customer satisfaction – some businesses pride themselves on providing a quality service or selling quality products to ensure customers are fully satisfied and will return. Shareholder value - shareholders in a company will be interested in how much their dividend payment will be or the value of the share price.

Answer 10

• Direction - Clear objectives will allow a business to decide on the direction it should take, for example whether it should expand or not. • Focus for employees - It is important that all employees follow the business’s objectives to help increase efficiency. • Allows planning - The business plan will be designed so that business objectives can be met. Clear objectives allow for consistent planning. • Measurement of success - Having business objectives allows a business to measure its success. The business can then correct or change its business strategy or plans if it is not working.