1.2 Understanding different business forms.

Question 1

Business form is split into what two categories? What are the differences between them?

Answer 1

Private sector and public sector. - Private: Owned by private individuals. - Public: Owned and run by the government.

Question 2

Public sector businesses- what businesses are owned and sometimes funded by the government?

Answer 2

• Public corporations - Public services - Municipal services

Question 3

What are public corporations?

Answer 3

• Enterprises owned by the state but offer products to both the public and private sector.
• Channel 4: managed by the government.
• Manchester Airport: managed by the local council.

Question 4

What do public services do?

Answer 4

They provide services to the nation such as the NHS.

Question 5

What are Municipal services ?

Answer 5

They are services offered by the local governments and councils such as leisure centres and libraries.

Question 6

The size of the public sector has declined over the last 30 years due to what?

Answer 6

Privatisation.

Question 7

What is privatisation?

Answer 7

When the state (government) sell businesses that they had owned and managed to private individuals and businesses.

Question 8

Why would the government privatise?

Answer 8

• To raise finance for the government. - Privately run businesses are more efficient.

Question 9

When you become a company, what do shareholders have? What does this mean?

Answer 9

Shareholders have limited liability!! This means that if the business gets into debt, the shareholders only lose the money invested into the business not their own personal belongings.

Question 10

What is a sole trader?

What are they comman in?

Answer 10

A business owned by a single person, although a business may have a number of employees.

Comman in retailing and services e.g. plumbing and hairdressing.

Question 11

What are the features of a sole trader?

Answer 11

• Unlimited liability
• Long hours/ stress/ workload
• No continuity
• No specialist skills
• Keep all profits
• Be their own boss
• Sources of finance are limited
• Raise all the capital themselves
• Make all decisions
• Financial information is kept private
• Easy and cheap to set up

Question 12

What is unlimited liability?

Answer 12

There is no distinction between the business and the individual, so if businesses are declared bankrupt- personal belongings can be taken to pay off any debts.

Question 13

What is a partnership?

Answer 13

These businesses comprise between 2 and 20 people who own a business, contributing capital and expertise.

Question 14

What are features of a partnership?

Answer 14

• Easy and cheap to set up. - Specialist skills. - Financial information kept private. - Additional sources of finance. - Must respect partner’s decisions. - Sleeping partner. - Partners may not agree. - Shared workload. - No continuity

Question 15

How can you get rid of unlimited liability?

Answer 15

By becoming a company- through the incorporation process.

Question 16

To become a company- what documents must the owners complete?

Answer 16

• Memorandum of association - Articles of Association - Register with companies house.

Question 17

What is a company?

Answer 17

A business organisation that has its own legal identity and has limited liability.

Question 18

What is incorporation?

Answer 18

The process of establishing a business as a separate legal identity that allows it to benefit from limited liability.

Question 19

What is a shareholder?

Answer 19

An invested of a business and an owner.

Question 20

What are dividends?

Answer 20

Are the share in the companies profits that are distributed to the holders of certain types of company shares.

Question 21

What is limited liability?

Answer 21

Limited liability means that the owners of the business are seen as separate to the business.

Therefore if the business gets into debt or is sued, the shareholders only lose the money invested into their business and none of their personal assets.

Therefore their liability is limited to the amount they have invested.

Question 22

Companies are split into what two categories?

Answer 22

Private limited company (Ltd) Public limited company (PLC)

Question 23

How can you measure the size of a PLC? What is this?

Answer 23

Market capitalisation- the total value of the shares issued of a PLC. Market capitalisation= share price x number of shares

Question 24

What are not-for-profit organisations also known as ?

Answer 24

Social enterprises!!

Answer 25

………

Question 26

Why buy shares?

Answer 26

1. Income: Shareholders are entitled to a share of the companys profits known as a dividend.
2. Capital growth- shareholders hope that their value of the shares will increase over time.

Question 27

What are the risks of buying shares?

Answer 27

• Share price can fall dramatically no matter how well a business is run. - Lower profits= low dividends. -

Question 28

Why be a shareholder?

Answer 28

ANSWER!

Question 29

What can influence share prices?

Answer 29

-Company’s performance and business environment. - PLC publish their financial results twice a year. - Economy, employment level, manufacturing production.

Question 30

What are the advantages of rising share prices?

Answer 30

• Reflect well on the management. - Easier to raise capital.

Question 31

What are the disadvantages of falling share prices?

Answer 31

• Poor management - Difficult to raise capital - Vulnerable to a takeover

Question 32

What are the two types of corporate businesses?

Answer 32

Private limited companies & Public limited companies.

Question 33

What are the two types of uncorporated businesses?

Answer 33

Sole traders & partnerships

Question 34

What do corporate businesses have?

What do they benefit from?

Answer 34

They have a legal identity that is separate from their owners.

Their owners benefit from limited liability.

Question 35

What are the two methods by which the liability of shareholders can be invested?

Answer 35

1. By shares- a shareholders liability is limited to the value of the shares that he/ she has purchased.
2. By guarantee- each members liability is restricted to the amount he/she has agreed to pay in the event of the business being wound up- this is more comman for not-for-profit businesses.

Question 36

What are corporate businesses?

Answer 36

Businesses which have a legal identity that is separate from that of their owners.

Question 37

Private limited companies- facts.

Answer 37

1. Normally much smaller than public limited companies.
2. Share capital must not exceed £50,000
3. Ltd must be included after the companies name
4. Shares can not be bought or sold without the agreement of the other shareholders.
5. Shares cannot be sold on the stock exchange.
6. Normally relatively small and family run businesses.

Question 38

Public limited companies- facts

Answer 38

1. The shares can be traded on the stock exchange and bought by any businesses or individuals.
2. Must have the term plc after their name.
3. Must have a minimum capital of £50,000 by law.
4. Have to publish more details of their financial affairs than do private limited companies.

Question 39

Those forming a company must send what two main documents to the Registrar of companies & what do they include?

Answer 39

Memorandum of Association: Sets out the details of the company’s name and address and its objectives in trading.

Articles of Association: Details the internal arrangements of the company including the frequency of shareholders meetings.

Question 40

What are non-corporate businesses?

Answer 40

Sole traders & partnerships. The owners and businesses are not seen as separate, therefore if the business gets into debt, the owners can risk losing their personal assets as they have limited liability.

Question 41

What is a partnership usually based on and what is this?

What may some partners also be and what does this mean?

Answer 41

A Deed of Partnership- states how much capital each partner has contributed, the share of profits each shall recieve and the rules for electing new partners.

Sleeping partners: They contribute capital but take no active part in the business.

Question 42

What are not-for-profit businesses?

Answer 42

An organisation that has business objectives other than making a profit.

Question 43

Give examples of non-profit objectives.

Answer 43

1. To provide services to local communities.
2. To give people job related skills and training.
3. Fair trading activities.

Question 44

What may businesses do to support fair trade?

Answer 44

1. Import products from less developed countires but may pay above the market price for the products.
2. May invest in facilities, such as education and healthcare, in the exporting communities.

Question 45

What are Mutuals and what do they stand for?

Answer 45

Generally private businesses whose ownsership base is made up of their clients and policy holders.

They are characterised by the fact that they are run for the benefit of their members e.g. cooperatives.

Question 46

Sole trader advantages.

Answer 46

1. simple and cheap to establish with few legal formalities.
2. The owner recieves all the profits.
3. Able to respond quickly to changes in the market.
4. Confidentiality is maintained as financial details do not have to be publsihed.
5. Quick and easy to make decisions
6. Get to be your own boss.
7. Fulfill hobby

Question 47

Disadvantages of being a sole trader.

Answer 47

1. The owner is likely to be short of capital for investment and expansion.
2. Few assets for collateral to support applications for loans.
3. Unlimited liability.
4. It can be difficult to take holidays- long working hours.

Question 48

Advantages of a partnership.

Answer 48

1. Partners may have a wide range of skills/ knowledge.
2. Able to raise greater amounts of capital then sole traders.
3. Pressure on owners is reduced as cover is available for holidays and there is support in making decisions.

Question 49

Disadvantages- partnerships.

Answer 49

1. Control is shared between the partners.
2. Arguments are comman among the partners.
3. There is still an absolute shortage of capital- even 20 people can only raise so much.
4. Unlimited liability

Question 50

Private limited company advantages.

Answer 50

• limited liability.
• Access to greater amounts of capital.
• Only required to divulge a limited amount of financial information.
• Companies have a separate legal identity.

Question 51

Disadvantages- private limited companies.

Answer 51

1. Can not sell shares on the stock exchange.
2. Requiring permission to sell shares limits potential for flexability and growth.
3. Have to conform to a number of expensive administrative formalities.

Question 52

Public limited companies advantages.

Answer 52

1. Can gain positive publicity as a result of trading on the stock exchange.
2. Stock exchange quotation offers access to large amounts of capital.
3. Stock exchange rules are strict and this encourages investors to part with their money.
4. Suppliers will be more willing to offer credit.

Question 53

Disadvantages- public limited companies.

Answer 53

1. Stock exchange listing- emphasis is placed on short term financial results, not long term performance.
2. Required to publish a great deal of financial information.
3. Trading as PLC - result in significant administrative expenses.

Question 54

What is the public sector?

Give some examples.

Answer 54

When services and businesses are controlled by the government and local authorities.

e.g. police service

fire service

BBC

NHS

Local council- rubbish collection

Question 55

The public sector used to run a number of key industries and utilities, give some examples. What were they known as?

They have been sold off to the private sector through what process?

Answer 55

E.g. coal, steel, water telephone etc.

They were known as nationalised industries.

They have been sold off to the private sector through the process of privatisation.

Question 56

What are the reasons for choosing different forms of a business?

Answer 56

• Formalities& expenses: e.g. sole traders &partnerships are easy to set up with few formalities- this is ideal for a small business.
• Size and risk. If a business tends to remain small & carries little risk- sole trader/ partnership is the most appropriate form for the business.
• Objectives of the owners. e.g. if business owners objectives involve growth- forming an incorporated business might be more appropriate, it is likely to give greater access to capital & limited liability would reduce risk.

Question 57

What are the main reasons for a business changing form?

give an example for each.

Answer 57

• Circumstances- e.g. due to changing circumstances such as growth, the owner may wish to become incorportated in order to benefit from limited liability.
• Capital- The owner/s may find it easier to raise capital by becoming incorporated or by becoming a public limited company if it is a private limited company.
• Acquisition or takeover- May cause a change of structure, e.g. a private limited company may be taken over by a public limited company.

Question 58

What are the reasons for why shares and dividend may fluctuate?

Answer 58

• Performance- If there are worse than expected profits, shares will go down in value. If profits are higher, then share values will increase.
• Expectation of better or worse profit performance: This might be as a result of a new product being launched on the market.
• Changes within the competitive environment or market: e.g. the move consumers from the mainstream supermarkets e.g. Tesco to discounters such as Lidle/ Aldi, this will affect the value of Tescos shares.
• World uncertainity: Conflict in the middle east for example or an economic downturn will cause share prices to fluctuate.

Question 59

What is market capitalisation/ how is it calculated?

Answer 59

MC= share price x number of shares issued.

It gives valuation of a company.

Question 60

What could a falling share price possibly provide an opportunity for?

Answer 60

Investment or a takeover!