1.2 Types of business entities

Question 1

Private sector

Answer 1

the portion of an economy not controlled or owned by the government

Question 2

Public sector

Answer 2

those portions of the economy owned or controlled by the government, such as government services, public schools, and state-owned corporations

Question 3

Sole traders

Answer 3

A business owned and operated by one person. No legal distinction exists between the business and the owner. So, the owner has unlimited liability for the liabilities of the business, and the business stops to exist when the owner dies

Question 4

main features of sole traders

Answer 4

• The sole trader owns and runs the business.
• No legal distinction exists between the business and the sole trader
• The finance is usually limited
• The business is often geographically close to the costumer
• The sole trader has privacy and limited accountability
• Registering the business is generally relatively easy, inexpensive and quick

Question 5

Advantages of sole traders

Answer 5

• all profits from the business belong to the sole trader, as no legal distinction separates the owner from the business
• Complete control over all the important decisions
• Flexibility in terms of working hours, products and services, and changes to operations
• Privacy, as sole traders generally do not need to divulge (to make known) information
• Minimal legal formalities
• Close relationships to costumers, which can give a competitive advantage

Question 6

Disadvantages of sole traders

Answer 6

• Competing against established businesses all by yourself can be an intimidating challenge
• There may be stress and potential ineffectiveness because the sole trader makes all the decisions, often with limited time to make them and limited opportunity to seek advice from others
• There will be a lack of continuity in the event of a serious accident or the owner’s death, the business itself may not continue
• There may be limited scope for expansion as the owner spends all their time running the business

Question 7

Partnerships

Answer 7

A business owned and operated by 2 or more people. No legal distinction exists between the business and the partners, each of whom are legally responsible for 100% of the liabilities of the partnership

Question 8

Main features of partnerships

Answer 8

• Decisions are made jointly by the partners
• The business is owned and managed by more than one person
• No legal distinction exists between the business and the partners
• Finance is usually more available than for one sole trader business
• Some partners may be “sleeping partners”
• The business operated as a partnership can often offer a more varied service than a sole trader
• Partnerships typically have a greater degree of accountability than a sole trader
• Partnerships are typically more stable than sole traders and have a higher likelihood of continuity
• Partners do not necessarily share all of the profits equally

Question 9

Advantages of partnerships

Answer 9

• As partners often bring different skills and qualities, partnerships may have more efficient production as a result of the specialization and division of labour
• In general, partners bring more expertise to a business than one person can
• As partnerships are perceived as having greater stability and lower risk, they generally have access to more finance
• Partners can help in emergencies or when others are ill or on holiday
• Partnerships have more chance of continuity as the business will not necessarily end if one partner dies

Question 10

Disadvantages of partnerships

Answer 10

• Each partner has unlimited liability, which means that each partner is legally responsible for all of the business’s debts or the actions of any other partner.
• Compared to businesses that operate as companies (corporations), partnerships usually have less access to loans from banks and other financial institutions. Limited finance can often prevent a business from expanding or maximizing opportunities for making profits
• An individual partner does not have complete control over the business and has to rely on the work and goodwill of others
• Profits must be shared among the partners
• Partners may disagree, which in the worst case could lead to the break-up of the partnership

Question 11

Company (corporation in the US)

Answer 11

a business entity that is legally recognized as separate from its owners (shareholders), and it has limited liability

Question 12

The main features of a company

Answer 12

• The shareholders own but do not necessarily run the business. Their purchase of shares provides finance, but otherwise the shareholders have little input into the day-to-day running of the business.
• The business and the owners are legally separated entities. The shareholders are not liable for any debts of the business. The shareholder’s liability is limited to their investment in the company.
• The details of the company’s formation are legally recorded and are matters of public record.
• Greater finance is generally available. The initial offering of shares represents a one-time injection of capital to the business.
• A company is held to a high degree of accountability.
• Compared to other forms of business organizations, companies have greater stability and a higher chance of continuity.

Question 13

Advantages of a company

Answer 13

• Finance is more readily available than for sole traders and partnerships.
• The investor has limited liability. Investors can only lose the value of the shares and nothing else.
• There is continuity. The business will not necessarily end if a shareholder dies or sells their shares, or if any of the directors leave.
• There are possibilities for expansion. Companies have more opportunity to expand because generally they last longer and have more access to finance.
• An established organizational structure exists.

Question 14

Disadvantages of a company

Answer 14

• Setting up a company can take time and cost a great deal of money to fulfill the necessary legal requirements
• Selling shares, especially if the company “goes public” does not guarantee that the desired or intended amount of finance will be raised
• Owners risk partial or entire loss of control of the business.
• There is a loss of privacy. A publicly held company is requires to complete a number of legal obligations, including publishing its accounts publicly
• A company has no control over the stock market. Share prices may fall, which can damage the image of the company
• A company has limited control over who buys its shares

Question 15

Advantages of being a shareholder

Answer 15

• The price of the share(s) they hold may increase in value if the company is performing well
• The company issues a portion of the company profit as dividends
• The shareholder has limited liability

Question 16

Disadvantages of being a shareholder

Answer 16

• The price of the share(s) they hold may decrease in value if the company is not performing well
• The company may choose not to issue dividends if it does not have to.
• As “owners” often own only a fraction of the shares of the company, owning shares in a firm may not mean that an individual shareholder has any meaningful say in decisions about the business

Question 17

Privately held companies

Answer 17

an incorporated business offering limited liability to the owners. Owners’ liability is limited to their investment in the company. In most countries, shareholders of privately held companies cannot sell their shares unless they have first been offered to existing shareholders; the shares cannot be traded on a stock exchange; and there are limits on the number of shareholders

shares are sold to people known to the owners (friends, family and associates). usually only 20 shareholders

Question 18

Publicly held companies

Answer 18

an incorporated business offering limited liability to the owners. Owners’ liability is limited to their investment in the company. The shares of the company are traded on some public exchanges, and publicly held companies must disclose or make public considerable information about the company, including audited financial information.

Question 19

For-profit social enterprise

Answer 19

an organization with many similarities to a normal social enterprise, except that it often earns a profit, some of which might be distributed to owners. The primary aim of a for-profit social enterprise is to provide a social service

Question 20

Social enterprise

Answer 20

business that advances a social purpose in a financially sustainable way. While aiming to do a social good, social enterprises must rely on business models, have sales revenue, and reinvest what profits they make on the business. Social enterprises generally do not depend on philanthropy

Question 21

3 types of for-profit social enterprises

Answer 21

• public sector companies
• private sector companies
• cooperatives

Question 22

Cooperatives

Answer 22

business organization owned and operated by its members, who share any profits. Cooperatives exist in many industries but are common in agriculture

Question 23

main features of cooperatives

Answer 23

• form of partnership where the business is owned and run by all the “members”
  -Unlike partnerships, which in most countries have limits on the numbers of partners, cooperatives usually have many members
• Each member participates actively in the running of the business

Question 24

5 forms of cooperatives

Answer 24

• financial cooperative
• housing cooperative
• workers’ cooperative
• producer cooperative
• consumer cooperative

Question 25

Priority of cooperatives

Answer 25

Mostly, the cooperative’s priority is not to make profit. Rather, the cooperative sells or offers its products or services typically at as close to cost price as possible → lowering the costs to members

Question 26

Main Common features of for-profit social enterprises

Answer 26

- Profit is important but not the priority, social aims are prioritized - A high degree of collaboration between the business and the local community exists - Cooperatives are more democratic than other typical for-profit companies or organizations - The business operates the same functions as any other business (human resources, marketing, finance and accounts, production)

Question 27

Advantages of for-social enterprises

Answer 27

- A favourable legal status is achieved. Anyone can engage in activities that are good for humans, society or the environment - A strong communal identity exists - The stakeholder community benefits

Question 28

Disadvantages of for-social enterprises

Answer 28

- Decision-making is complex and time-consuming. They are consultative and transparent so they often take a long time to make decisions - Capital may be insufficient for growth - Capital may be insufficient for financial strength. They tend to have lower profit margins and profits than traditional for-profit businesses because they often try to make their products and services as inexpensive as possible

Question 29

Non-profit social enterprise

Answer 29

an organization with many similarities to a normal social enterprise, except that is is less willing to (and often does not) earn a profit or surplus. The primary aim is to provide a social service

Question 30

Non-governmental organizations (NGO)

Answer 30

non-profit organization often with a humanitarian or social purpose. NGOs are independent of government, but they often receive government grants or funding and cooperate with government

Question 31

Common features of non-profit social enterprises

Answer 31

- Profits are not generated. Instead, they generate surpluses and surpluses are used to advance the social purpose of the business. - Donations are important. These businesses cannot rely on government funding or other forms of income, so a large part of their revenues come from voluntary donations from individuals. - There is unclear ownership and control. Who owns these organizations? Who should decide who sits on the board of directors?

Question 32

Advantages of non-profit social enterprises

Answer 32

- They help people or causes in need - They can foster a philanthropic (seeking to promote the welfare of other) spirit in the community. People may feel good about helping others, which can foster socially constructive views in general - They can foster informed discussions in the community about allocation of resources - They can innovate. Employees or members are often “forced” to be creative → to try new ideas and tactics to adress problems and find solutions, because non-profit social enterprises often do not generate surpluses and therefore do not have funds for reinvestment

Question 33

Disadvantages of non-profit social enterprises

Answer 33

- Intense lobbying (influence political decisions) from non-profit social enterprises can lead to socially undesirable goods - Sometimes the employees of non-profit social enterprises are so passionate and enthusiastic that it ends up being harmful for the organization or its cause - Funding can be irregular