1 Business structure and ownership

Question 1

What are social enterprises?

Answer 1

Businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or community, rather than being driven by the need to maximise profit for shareholders and owners. It is important to appreciate that a social enterprise is not a charity because it does not rely on donations to survive (self-sustaining)

Question 2

What is the difference between the private and public sector

Answer 2

•Public Sector - The part of the economy that is
controlled by the state. Normally provides essential services, Differs around the world, Normally funded via taxes, government borrowing and by charging users for services.
•Private Sector - Refers to the section of the
economy that is not under state control

Question 3

What is a sole trader business?

Answer 3

Sole trader is an unincorporated business that is owned by one person. It may have one or more employees and it is the most common form of ownership in the UK.

Question 4

What advantages are there to a sole trader business?

Answer 4

• Keep all the profit as the owner
• Cheap and easy to start up with few
  forms to fill in
• Total control to be your own boss
• Business affairs are private i.e.
  competitors cannot see what you are doing and earning

Question 5

What disadvantages are there to a sole trader business?

Answer 5

• Unlimited liability
• Continuity: if the sole trader retires or dies the business closes
• Long work hours and sacrificing holidays
• Unable to enjoy benefits of economies of scale (having higher costs per unit due to lower levels of production)

Question 6

Why might sole trader businesses be successful?

Answer 6

• Can offer specialist services to customers – e.g. appliance repair specialists.
• Can be sensitive to the needs of customers – since they are closer to the customer and will react more quickly, because they are the decision makers too.
• Can cater for the needs of local people – a small business in a local area can build up a following in the community due to trust – if people can see the owner they feel more comfortable than if the owner is in some far off town, not able to hear the views of the local community

Question 7

What is a partnership?

Answer 7

A partnership is an unincorporated business owned and run by two or more individuals. Most partnerships are between two and twenty members though some can have hundreds of partners.

Question 8

Advantages of a partnership?

Answer 8

• Shared risk across owners; debt can be shared
• Partner may bring money and resources to the business
• Partner may bring skills, experience and ideas to the business

Question 9

Disadvantages of a partnership?

Answer 9

• Unlimited Liability
• Share profits
• Less control versus a business run by
  a single individual
• Problems if partners dispute over of
  direction of business

Question 10

What is a deed of partnership?

Answer 10

A deed of partnership is a legal document containing the agreement terms between partners setting up a partnership business. This contains:
• Amount of capital each partner should provide (i.e. starting cash).
• How profits or losses should be divided.
• How many votes each partner has (usually based on proportion of capital provided).
• Rules on how to take on new partners.
• How the partnership is brought to an end, or how a partner leaves.

Question 11

What is an LTD?

Answer 11

A private limited company is an incorporated business; which gives owners limited liability. This type of business entity limits the number of shareholders to 50, and restricts shareholders from publicly trading shares.

Question 12

Advantages of an LTD?

Answer 12

• Limited Liability
• Continued Existence - the company outlasts the life of the founders
• Easy to setup
• Credibility and reputation - easier to
  raise funds from banks/creditors

Question 13

Disadvantages of an LTD?

Answer 13

• Legal restrictions - more paperwork
• Shares cannot be advertised nor listed on the stock exchange
• Incorporation & Administrative costs are high
• Termination process can be complex

Question 14

What is a PLC?

Answer 14

A public limited company is a larger incorporated business that sells its shares to the public on the stock market. People who own shares are called ‘shareholders’. They become part owners of the business and have a voice in how it operates.

Question 15

Advantages of a PLC?

Answer 15

• Limited Liability
• Shares can be traded on the stock exchange and sold to the general public
• Easy to raise finance by selling shares to the public
• High image and reputation

Question 16

Disadvantages of a PLC?

Answer 16

• High set-up costs: issued share capital (initial value of shares put on sale) must be greater than £50k
• Have to publish financial accounts
• Greater scrutiny of activities
• Divorce of ownership and control (founders may lose control if more than 51% of shares are sold)

Question 17

What is Triple Bottom Line (TBL)?

Answer 17

• In business the phrase bottom line refers to profit.
• The triple bottom line aims to measure the financial, social, and environmental performance of a company over a given time.
• The TBL consists of three elements: profit, people, and the planet.
• TBL theory holds that if a firm looks at profits only, ignoring people and the planet, it cannot account for the full cost of doing business sustainably.

Question 18

What is a franchise?

Answer 18

A franchise is an agreement between two parties, a Franchisor (seller) and a franchisee (buyer). It is where the franchisor sells to the franchisee the right to sell its products, services and logos, usually in a specified area.

Question 19

Advantages of a franchise?

Answer 19

• A tried and tested business idea: logos and products are already established in the market
• A designated area of operation with no competition from other franchises from the same company
• Training and advice
• National advertising campaigns

Question 20

Disadvantages of a franchise?

Answer 20

• A large amount of initial capital (money) may be required
• An annual royalty payments on the profit or turnover may have to be paid to the franchisor
• All supplies must be purchased from the franchisor
• The owner may not have total control over how the business operates

Question 21

What is a cooperative?

Answer 21

A business that is owned operated on a voluntary basis for the mutual benefit or interest of its members - people who use either use the businesses services, buy its goods, or are employed by it. Each member contributes and has a say in decision making and gets one vote so no one has more control than anyone else.

Question 22

Advantages of a cooperative?

Answer 22

• Can purchase in bulk and achieve economies of scale
• Working together in problem-solving and taking on decisions
• Can be good motivation of all members to work hard as they will benefit from shared profits

Question 23

Disadvantages of a cooperative?

Answer 23

• Poor management skills unless professional managers are employed
• Capital shortages because shares are not allowed to be sold to the general public
• Slow decision making if all members are to be consulted on important issues

Question 24

What is a joint venture?

Answer 24

A joint venture (JV) is a separate business entity created by two or more parties, involving shared ownership, returns and risks. Usually this is a 50:50 share.

Question 25

Advantages of a joint venture?

Answer 25

• Profiting from each other’s expertise and resources (things like customer base, market knowledge, distribution channels, etc.)
• Each JV partner might have the option to acquire in the future the JV business based on agreed terms if it proves successful
• Reduce the risk of a growth strategy - particularly if it involves entering a new market or diversification

Question 26

Disadvantages of a joint venture?

Answer 26

• Risk of a clash of organisational cultures - particularly in terms of management style
• The objectives of each JV partner may change, leading to a conflict of objectives with the other
• In practice, there may turn out to be an imbalance in levels of expertise, investment or assets brought into the venture by the different partners
• Closing or selling a JV amicably may not be possible if disputes arise

Question 27

Why measure business size?

Answer 27

• BUSINESSES VARY IN SIZE FROM SOLE TRADERS TO HUGE MULTINATIONAL CORPORATIONS
• COMPARISONS ARE MADE SO THAT GROWTH OR CONTRACTION CAN BE ASSESSED OVER TIME
• GOVERNMENT, INVESTORS, MANAGERS, ARE INTERESTED ABOUT THE SIZE OF COMPANIES

Question 28

What methods are there to measure business size?

Answer 28

• Number of employees - simplest measure to understand
• Sales turnover - total value of sales in a given time period
• Capital employed - total value of all long-term finance invested in the
business
• Market capitalisation - company’s issued shares used only for businesses that
have shares ‘quoted’ on the stock exchange
• Market share - sales of the business as a proportion of total market sales
• Other methods

Question 29

Why are small businesses important?

Answer 29

• Create job opportunities
• They are dynamic entrepreneurs – having new ideas giving variety to
consumers
• They are competitive with larger firms; preventing larger firms
from exploiting consumers with high prices
• It is a starting point to grow to become a big firm in the future
• Provides local convenience

Question 30

What is the purpose of HRM?

Answer 30

The central purpose of HRM is to recruit, train and utilise a business’s personnel in the most productive manner to assist the organisation in the achievement of its objectives

Question 31

What do HR Managers do?

Answer 31

• Plan the workforce needs of the business
• Recruit and select appropriate staff
• Appraise, train and develop at every stage of their careers
• Preparing contracts of employment
• Involve all managers in the development of staff
• Improve staff morale and welfare
• Develop appropriate pay systems for different categories of staff
• Measure and monitor staff performance

Question 32

What factors affect planning the number and skills of a workforce a business needs in the future?

Answer 32

Number:
- Forecast demand for the product 
- Productivity levels of staff
- Objectives of the business 
- Changes in the law regarding workers’ rights
- Predicted labour turnover and absenteeism 
rate 
Types of skills:
- Pace of technological change 
- The need for flexi or 
multi-skilled staff

Question 33

What are some common business objectives for smaller firms?

Answer 33

• Survival - A key objective for startup firms and many smaller firms. Whilst small firms have lower costs, over-reliance on one or a few products can threaten survival.
• Revenue Maximisation - Rarely a key objective for smaller firms, although they are often keen to grow sales albeit from a low base level.
• Profit Maximisation - Smaller firms will normally earn lower absolute levels of profit (because their revenues are lower). However, they can still achieve high profit margins if operating in a suitable niche market.
• Cost Efficiency & Scale - Smaller firms are unlikely to benefit from economies of scale although they may be good at keeping their cost base low.
• Customer Service - Smaller firms are often associated with higher levels of customer service and satisfaction, often because the business owner is closely involved with the provision of customer service.

Question 34

Explain some reasons why a business might want to stay small

Answer 34

• Product differentiation & USP
• Flexibility in meeting customer needs
• Deliver high standard of customer service
• Exploit opportunities from e-commerce