3.1.2

• Unincorporated businesses include...

  • sole traders
  • partnerships
• Incorporated businesses include...

  • private limited company
  • public limited company
• What is an unincorporated business?

  • owner is the business - no legal difference
  • unlimited liability for business actions
• What is an incorporated business?

  • legal difference between the business and the owner
  • limited liability
• What is unlimited liability?

  • business owners are personally responsible for the debts and liability of the business
  • if the business fails, the owners are liable for the amounts owed
• Sole traders -

  • most common type of business structure
  • an individual owning the business on their own
  • employees don't have a share in the ownership of the business
  • unlimited liability - owns all business assets personally so personally responsible for business debts
• Sole Traders - Advantages

  • quick and easy to set up - can always be transferred to a limited company once launched
  • simple to run - owner has complete control
  • minimal paperwork
  • easy to close/shut down
• Sole Traders - Disadvantages

  • full personal liability - unlimited liability
  • harder to raise finance - often have limited funds of their own and security against which to raise loans
  • business is the owner - business suffers if the owner becomes ill, loses interest etc.
  • can pay higher tax rate than a company
• What is limited liability?

  • important protection for shareholders in a company
  • shareholders can only lose the value of their investment
  • doesn't protect against:
  • fraudulent trading
  • when personal guarantees have been made by directors
• Limited Company:

  • separate legal entities to the founders
  • owned by shareholders and run by directors
  • shareholders appoint directors who run the company in the interests of the shareholders
  • company owns assets and pays the debts
  • shareholders are not liable for debts
• Limited Company - Advantages

  • limited liability
  • easier to raise finance
  • stable form of structure - business continues to exist even when shareholders change
• Limited Company - Disadvantages

  • greater admin costs
  • public disclosure of company information
  • directors' legal duties
• Public Limited Company

  • shares may be quoted and traded on a public stock market
  • when traded on a stock market, public companies have substantially more shareholders
  • subject to greater regulation in terms of public disclosure of financial and other information
• Private Limited Company

  • private means that the shares of the company are not traded publicly on a stock exchange
  • shares are usually sold to friends and family who will receive dividends from their investment
• Public Sector Companies

  • relatively small number of companies are owned or controlled by the government
• Private Sector Companies

  • many more organisations that provide goods and services which are run by individuals
• Not-for-profit organisations:

  • businesses that trade in order to benefit the community
  • have social and ethical aims as well as trying to make a financial return
• Social Enterprise:

  • many different types of social enterprise -
  • community development trusts
  • housing associations
  • worker-owned co-operatives
  • sports clubs
• What are dividends?

  • payments by a company to its shareholders from the profits made by the company
  • part of the return on investment received by shareholders
• The role of shareholders:

  • shareholders are responsible for appointing the board of directors, who are responsible for day to day running of the business
  • in a private limited company, shareholders and board of directors may be the same person
  • in a public limited company, likely to be more shareholders so board of directors may be separated from the owners
• Why should shareholders invest:

  • invest to earn a return
  • two parts to the return - dividends and increase in the share price
  • higher dividends increase the attractiveness of investment to potential shareholder
  • also earn a return if the share price increases above the price that they paid for them
• Influence on share price:

  • share price is determined by the interaction of supply and demand
  • if the demand for a share is more than the supply then the share price should rise
  • falling share price indicates excess supply (more sellers than buyers)
• Influence on share price - factors within the company's control

  • financial performance (e.g. profit growth)
  • dividend policy
  • relationship with key investors
  • management reputation
• influence on share price - factors outside of the company's control

  • state of the economy
  • general market sentiment
  • whether the company is a takeover target
  • alternative investments in the company's sector
• The significance of share price changes

  • it can not only affect the market capitalisation of the company but is also an indicator of the company's financial performance, its growth prospects and the overall state of the economy
• The effect of ownership on mission and objectives:

  • sole traders are often smaller organisations, and the owner is usually heavily unvalued in the day-to-day running of the business
  • the objectives of a sole trader are likely to focus on survival, given that a large population of start-ups fall in the first few years
  • sole traders can make all their own decisions as they do not have shareholders to consider
• The effect of ownership on mission and objectives (part 2):

  • shareholders in private limited companies are likely to be involved in the running of the business
  • this may allow for a longer-term view, so objectives will likely focus on market share, customer satisfaction or revenue growth instead of profit maximisation
  • in public limited companies, shareholders are often interested in higher dividends and rising share prices to maximise returns
  • as a result, the directors could be encouraged to set more ambitious objectives relating to profit maximisation