3.1.2 Understanding different business forms

Question 1

Draw a diagram relating to the public and private sectors of the UK economy

Answer 1

local authority undertakings incl the Borough Council

Question 2

What is the private sector?

Answer 2

part of the economy that is not state controlled, and is run by individuals and companies, usually for profit

Question 3

What is the public sector?

Answer 3

this refers to all the businesses and organisations which are owned and run by the government

Question 4

What are 8 factors affecting the choice of business forms?

Answer 4

• Sources of finance
• Size
• Taxes
• Profit (who shared with)
• Risks
• Ownership and control
• Registrations and payment
• Liability (limited and unlimited)

Question 5

What is unlimited liability?

Answer 5

owners are personally responsible for the debts of the business. This means their personal possessions such as their cars etc would pay for debts should the business go bankrupt

Question 6

What is limited liability?

Answer 6

the business has its own legal identity from its owner

Question 7

What is a sole trader?

Answer 7

a person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses.

Question 8

What are strengths of a sole trader?

Answer 8

• Don’t need to register anywhere (only have to tell HMRC)
• Owner keeps all of the profits
• Can’t sell shares so have complete control
• Are their own boss – no arguments

Question 9

Weaknesses of a sole trader

Answer 9

Unlimited liability – can take personal possessions if the business goes into debt
Complete control (no other option)
Can’t sell shares so no extra money
Little start up capital to begin with

Question 10

What is a private limited company?

Answer 10

A private limited company (Ltd) does not publically trade shares and is limited to a maximum of fifty shareholders

Question 11

Strengths of a private limited company

Answer 11

Limited liability – can only take assets that belong to the business to pay off debts
Can use lots of ways to raise finance

Question 12

Weaknesses of a private limited company

Answer 12

Profits must be shared with the shareholders in the form of dividends
Corporation tax
Have to pay to register the business

Question 13

What is a public limited company?

Answer 13

Organisation that is owned by shareholders, and managed by directors. Members of the public can purchase stock, and most pay out dividends once or twice a year

Question 14

Strengths of a public limited company

Answer 14

Limited liability – can only take assets that belong to the business to pay off debts
Can use all types to raise finance

Question 15

Weaknesses of a public limited company

Answer 15

• Profit must be shared with the shareholders in the form of dividends
• £50,000 raised money to register with the Companies’ House
• Corporation tax

Question 16

What are shareholders?

Answer 16

they are the owners of a limited company and they gain their financial reward from share ownership

Question 17

What are two ways in which shareholders gain financial rewards?

Answer 17

• A share of the profits earned by the company – paid out as a dividend
• Growth in the value of their shareholding (compared with the cost of buying the shares) – which is “realised” when the shareholder sells the shares to someone else

Question 18

What role do shareholders play?

Answer 18

Shareholders play an important role in the financing, operations, governance, and control aspects of a business

Question 19

What is share price?

Answer 19

The share price indicates the market value of the business

Question 20

What is market capitalisation?

Answer 20

• = this represents the total market value of the issued share capital of the company.
• = the current share value x the number of shares issued
• When demand for shares increases, the share prices increase too

Question 21

Factors that affect share price

Answer 21

• Number of shares available
• Business expansion
• Investment
• Publicity
• E-commerce
• A recession – this will devalue shares significantly

Question 22

How does the number of shares available affect share price?

Answer 22

the more shares that are available, the more people will want to invest in them, eventually leading to an increase in share price

Question 23

How does business expansion affect shareholder dividends?

Answer 23

Shareholders will receive more dividends due to an increase in profit margins

Question 24

How does investment affect share price?

Answer 24

if investment decisions work, then share value will increase and so more people will want to buy them. However in the short term, most of the profit made will be reinvested back into the business so dividends will decrease significantly

Question 25

How can mission and objectives change with business forms (sole trader, Plc, NPO)?

Answer 25

• Sole trader – achieve a work life balance
• PLC – pressure to maximise shareholder’ return
• NPO – focused on achieving social actions

Question 26

How does decision making and speed of it change with business forms?

Answer 26

• Sole Trader – make decisions quickly and autonomously
• LTD – quickly consults shareholders
• PLC – go through more steps e.g. call a meeting
• NGO – consult members, difficult to co-ordinate

Question 27

How does performance change with business success?

Answer 27

• Better performance - Higher ability to employ specialist staff, access to finance, ability to maintain competitive advantage and embrace new tech