Business structure

Question 1

what is a private limited company

Answer 1

business that is owned by shareholders who are often members of the same family, this company cannot sell shares to the general public

Question 2

what is initial public offereing

Answer 2

an offer to to the public to buy shares in a public limited company

Question 3

what is public limited company

Answer 3

company whose shares are traded on a stock exchange and can be bought and sold by the public

Question 4

primary sector business activity

Answer 4

firms that extract natural resources so that they can be used and processed.

Question 5

secondary sector business activity

Answer 5

firms that manufacture and process products from natural resources,

Question 6

tertiary sector business activity

Answer 6

firms providing services to consumers and other businesses, such as retailing, transport, insurance, banking, hotels and tourism.

Question 7

quaternary sector business activity

Answer 7

businesses providing information services

Question 8

what is industrialisation

Answer 8

the growing importance of secondary sector manufacturing industries in developing countries. relative importance of each sector is measured in terms of either employment levels or output levels as a proportion of the whole economy.

Question 9

Benefits of industrialization

Answer 9

GDP increases and this raises average standards of living.

Increasing output of goods can result in lower imports and higher exports of such products.

Expanding manufacturing businesses will result in more jobs.

Expanding and profitable firms will pay more tax.

Value is added to the country’s output of raw materials, rather than exporting these as unprocessed products.

Question 10

consequences of industrialization

Answer 10

people move to towns for job that could lead housing and social problems.

imports of raw material are needed which increases country’s import cost.

much of the growth in secondary sector is due to expansion of multinational companies

Question 11

what is deindustrilization

Answer 11

in developed economies, there is a decline in the importance of secondary sector activity.

Question 12

changes of deindustrilization

Answer 12

higher living standards have led consumers to spend much of their income on services rather than goods. spending on physical goods has risen more slowly

Question 13

consequences of deindustrialization

Answer 13

job losses in primary sector.

movement of people to towns and cities.

job opportunities in tertiary and quaternary sector.

increased retraining programmes to allow workers to find employment in service industries

Question 14

what is public sector

Answer 14

organizations accountable to and controlled by central or local government

Question 15

what is private sector

Answer 15

businesses owned and controlled by individuals or groups of individuals

Question 16

mixed economy

Answer 16

economic resources are owned and controlled by both private and public sectors. nearly every country with mixed economy, most business activity is in the private sector. in some countries, important goods and services are provided by government owned or state run organizations

Question 17

free market economy

Answer 17

economic resource are owned largely by the private sector with very little state intervention. small public sectors

Question 18

command economy

Answer 18

economic resources are owned, planned and controlled by state. has few business in private sector

Question 19

public corporation

Answer 19

a business enterprise owned and controlled by the state aka nationalized industry. In some countries, important strategic industries, such as energy, water supply and public transport, are also owned and controlled by the state as public corporations.

Question 20

what are the advantages of public corporations

Answer 20

managed with social objectives rather than solely with profit objectives.

loss making services will be kept operating if social benefit is great enough. finance is mainly from government

Question 21

what are the disadvantages of public corporations

Answer 21

tendency towards inefficiency due to lack of strict profit targets.

subsidies from government can also encourage inefficiencies.

Question 22

sole trader

Answer 22

business in which one person provides the permanent finance and, in return, has full control of the business and is able to keep all of the profits.

Question 23

unlimited liability

Answer 23

business owners have full legal responsibility for the debts of the business.

Question 24

features of sole trader

Answer 24

have unlimited liability.
limitations in raising additional capital.
dependent on owners savings, profits and loans for capital

Question 25

advantages of sole trader

Answer 25

easy set up (no legal formalities).

owner has complete control.

owner keeps profit.

owner can choose times and patterns of working.

owner can establish close relationships with staff.

business can be based on interest or skills of owner.

Question 26

disadvantage of sole trader

Answer 26

unlimited liability.

intense competition from bigger firms.

owner is unable to specialize in areas of the business that are most interesting.

difficult to raise additional capital.

long hours.

when the owner dies, the business dies because it doesn’t have a separate legal status

Question 27

what is partnership

Answer 27

business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibilities. formed in order to overcome some of the drawbacks of being a sole trader. unlimited liability for all partners

Question 28

deed of formal partnership

Answer 28

provides agreement on issues such as voting rights, the distribution of profits, the management role of each partner and who has authority to sign contracts. However, a partnership agreement does not create a separate legal unit; a partnership is just a grouping of individuals.

Question 29

advantages of partnership

Answer 29

Partners may specialize in different areas of business management.

They share decision making.

Additional capital is injected by each partner.

Business losses are shared between the partners.

There is greater privacy and fewer legal formalities than in companies.

Question 30

disadvantages of partnership

Answer 30

no continuity and the partnership will have to be reformed in the event of the death of one of the partners.

partners are bound by the decisions of any one of them.

not possible to raise capital from selling shares.

A sole trader, taking on partners, will lose decision-making independence.

partners have unlimited liability (with some exceptions).

Profits are shared.

Question 31

Limited liability

Answer 31

the only liability - or potential loss-a shareholder has, if the company fails, is the amount invested in the company, not the total wealth of the shareholder. Nobody can make further claims against shareholders

Question 32

shares

Answer 32

certificate confirming part-ownership of a company and entitling the shareholder owner to dividends and certain shareholder rights.

Question 33

shareholders

Answer 33

person or institution owning shares in a limited company.

Question 34

effects of limited liability on shareholders

Answer 34

The risk of the company failing to pay its debts is transferred from investors to creditors such as suppliers and banks, Creditors, as a result, are very interested in analyzing the company’s accounts for signs of potential future weakness.

Question 35

Legal personality

Answer 35

companies have their own legal identity against law. company can be sued and itself sue. managers, owners and directors can still be legally responsible if they knowingly act irresponsibly.

Question 36

continuity

Answer 36

the death of an owner or director does not lead to its break up or dissolution. ownership continues through inheritance of shares and there is no break in ownership at all.

Question 37

sole trader to Private limited companies

Answer 37

usually shares are owned by the original sole trader, relatives, friends and employees. former sole trader often have the controlling interest. new issue of shares cannot be sold on open market. existing shareholders may sell with the agreement of other shareholders. legal formalities are same as plc

Question 38

advantages of private ltd companies

Answer 38

limited liability.

has a separate legal personality.

has continuity in the event of the death of a shareholder.

original owner is still often able to retain control.

able to raise capital from the sale of shares to family, friends and employees.

has greater status than an unincorporated business.

Question 39

disadvantages of private ltd companies

Answer 39

legal formalities involved in establishing the business.

Capital cannot be raised by the sale of shares to the general public.

difficult for shareholders to sell shares.

End-of-year accounts must be sent to the government office, and are available for public inspection (so there is less secrecy over financial affairs than for a sole trader or partnership).

Question 40

private limited company
to Public limited companies

Answer 40

Similar to pvt but shares can be sold on open market. can raise very large sums from public issue of shares. existing shareholders may also quickly sell their share if they wish to

Question 41

features of PLC

Answer 41

many investors like institutions and individuals buy the shares.

shareholders own company.

they appoint directors at AGM to control management and decision making.

shareholders and directors objectives can clash.

possible for plc to become pvt.

Question 42

advantages of plc

Answer 42

shareholders have limited liability.

the company has a separate legal identity.

there is continuity.

easy for share holders to buy and sell shares, encouraging investments.

substantial capital can be accessed due to the ability to issue a prospectus to the public and to offer shares for sale ( flotation)

Question 43

disadvantages of plc

Answer 43

formation entails legal formalities.

high charges for advice from business consultants when creating plc.

share price are subject to fluctuation.

disclosure of information to shareholders and public.

risk of takeover due to the availability of the shares on the stock exchange.

directors may be influenced by short term objectives of major investors

Question 44

legal formalities in setting up a company

Answer 44

Certain legal stages to protect investors and creditors. documents like memorandum of association and articles of association are needed. the registrar of companies will issue a certificate of incorporation when the documents are completed satisfactorily. private limited companies can start trading

Question 45

memorandum of association

Answer 45

this states the name of the company, the address of the head office through which it can be contacted, the maximum share capital for which the company seeks authorization and the declared aims of the business. knowing max share capital means relative importance of a share can be determined. shareholders can avoid busines they do not want to be associated with by knowing the aims

Question 46

Articles of association

Answer 46

this document covers the internal workings and control of the business, the names of directors and the procedures to be followed at meetings.

Question 47

Cooperatives

Answer 47

jointly owned business operated by members for their mutual benefit, to produce or distribute goods or services.

Question 48

features of cooperatives

Answer 48

All members can contribute to running the business and sharing the workload, responsibilities and decision-making.

In larger cooperatives some delegation to professional managers takes place.

All members have one vote at important meeting

Profits are shared equally among members

Question 49

Advantages of cooperatives

Answer 49

buying in bulk.

working together to solve problems and take decisions.

good motivation for all members to work hard as they will benefit from shared profits

Question 50

drawbacks of cooperatives

Answer 50

poor management skills, unless professional managers are employed.

capital shortages because the sale of shares to non members is not allowed.

slow decision-making if all members are to be consulted on important issues

Question 51

Franchises

Answer 51

the legal right to use the name, logo and trading systems of an existing successful business. contract allows franchisee to use name, logo and marketing methods. rapidly expanding form of business

Question 52

franchiser

Answer 52

a person or business that sells the right to open stores and sell products and services, using the brand name and brand identity

Question 53

franchisee

Answer 53

a person or business that buys the right from the franchiser to operate the franchise

Question 54

advantages of franchises

Answer 54

There are fewer chances of a new business failing because it is using an established brand name and product.

Advice and training are offered by the franchiser.

The franchiser pays for national advertising.

Supplies are obtained from established and quality-checked suppliers.

The franchiser agrees not to open another branch in the local area.

Question 55

disadvantages of franchises

Answer 55

A share of the profits or revenue has to be paid to the franchiser each year.

The initial franchise license fee can be expensive.

Local promotions may still have to be paid for by the franchisee.

The franchisee cannot choose which supplies or suppliers to use.

Strict rules over pricing and layout of the outlet reduce the franchisee’s control over their own business.

Question 56

joint ventures

Answer 56

two or more businesses agree to work closely together on a particular project and create a separate business division to do so.

Question 57

reason for joint ventures

Answer 57

The costs and risks of a new business venture are shared, which is a major consideration when the cost of developing new products is rising rapidly.

Different companies might have different strengths and experiences, and therefore fit well together.

They might have major markets in different countries and they could exploit these with the new product more effectively than if they both decided to ‘go it alone’.

Question 58

risks of joint ventures

Answer 58

Styles of management and culture might be so different that the two teams do not blend well together.

Errors and mistakes might lead to one company blaming the other for mistakes.

The business failure of one of the partners would put the whole project at risk.

Question 59

social enterprise

Answer 59

business with mainly social objectives that re-invests most of its profits into benefiting society rather than maximizing returns to owners. they often keep the profits. uses business principles to achieve social objectives

Question 60

common features of social enterprise

Answer 60

They directly produce goods or provide services.

They have social aims and use ethical ways of achieving them.

They need to make a profit to survive as they cannot rely on donations as charities do. `

Question 61

why would business change the form of ownership

Answer 61

access to more finance.

gaining legal identity.

protecting owners’ capital through limited liability.

Question 62

disadvantages of changing the form of business ownership

Answer 62

legal costs and formalities.

some loss of control and ownership by the original owner.

profits are shared.