Types Of Firms

• What are not-for-profit/social enterprises?


  Businesses that are operated commercially but with social welfare and environmental aims in mind.
• What are public/state sector organisations?


  Organisations that are owned and controlled by the state e.g. the NHS, social care, state schools, the police, HM forces.
• What are private sector firms?


  Private sector organisations are owned by private investors rather than by the state. 84% of jobs in the UK are in the private sector.
• What are LTDs/PLCs?


  - LTDs are private limited companies only selling shares to friends and relations of founder.

  - PLCs are public limited companies selling shares on the stock exchange.
• What are co-operatives and partnerships?


  Co-ops are owned and run by their members, who can be customers, employees, or groups of businesses.
• What can PLCs lead to?


  Hostile takeovers and loss of autonomy over the business.
• What does privatisation mean?


  The transfer of assets from the public (state of government) sector to the private sector of an economy. Privatisation causes a change of ownership.
• What are arguments FOR privatising the NHS?


  • workers can earn more potentially
  • quality of service would improve - more motivation fro higher income
  • cheaper to run - businesses more free to source where they like
• What are the arguments AGAINST privatising the NHS?


  • could lead to inequality as some may be unable to afford healthcare
  • England will lose a massive attraction
  • loss of subsidies from the government
  • objective profits - shareholders, dividends -> less investment
  • poor quality service - risk of differing opinions and owners acting in their own interest
  • reduces bulk buying discounts
• What is a sole trader?

  A sole trader is a business structure where an individual runs and owns the business, assuming all legal and financial responsibility.
• Does a sole trader have limited or unlimited liability?


  Limited liability - entrepreneur and business is seen as one entity and is personally responsible for any losses of the company, including personal assets.
• What is the definition of a partnership?

  
  

  • An arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests.
  • The partners in a partnership may be individuals, businesses, interest-based organisations, schools, governments, or combinations.
• Do partnerships have limited or unlimited liability?

  Unlimited.
• What are a couple details about partnerships?


  Shared profits, shared losses. Legal and financial liability equally.
• What is a corporation?


  An organisation - usually a group of people in a company - authorised by the state to act as a single entity and recognised as such in law for certain purposes.

  Separate legal existence and continuous life and transferability.
• Does a corporation have limited or unlimited liability?

  Limited liability
• What is meant by transferability?


  The costs involved in moving goods from one place to another.

  For example, costs of transport, costs of making the goods compliant with the regulations of the shipping destination and the costs associated with tariffs on duties.
• What is an s-corporation?


  Corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
• What are the four key requirements of a s-corporation?


  • no more than 100 shareholders
  • all shareholders must be private individuals, certain trusts or estates (not other business entities)
  • none of these shareholders can be nonresident aliens
  • the business may only issue one class of stock
• What is the principal agent problem?


  An asymmetric information problem. It comes about because owners of a firm often cannot observe directly easily and accurately the key day-to-day decisions of management.
• Who are the principal(s) in the principal agent problem?


  The owners of a business with a significant equity stake.
• Who do owners of a business hire?


  They hire an agent such as a sales or finance manager to make long day-to-day decisions affecting the business.
• Who are the agents in the principal agent problem?


  Managers such a s a sales or finance manager.
• What is different about the managers compared to the business owners?


  Managers may have different business objectives such as revenue maximisation or sales maximisation.
• When does the principal agent problem arise?


  When the interests of a company‘s owners (the principals) sure not aligned with those of its managers (the agents) who make decisions on their behalf.
• What can the principal agent problem lead to?


  It can lead to conflicts of interest, as managers may prioritise their own goals over the objectives on the company’s owners.
• What are the 3 main ways corporations can help overcome the principal agent problem?


  • align the incentives
  • increase transparency
  • appoint independent directors
• How can aligning incentives help to overcome the principal agent problem?

  By offering incentives that tie to the company’s performance, it gives managers a direct stake in the success of the company and can motivate them to make decisions that benefit shareholders.
• How can increasing transparency help to overcome the principal agent problem?


  Transparency can help to mitigate asymmetric information between managers and owners.

  Owners can monitor the decisions made by managers an ensure they are acting in their best interest.
• How can appointing independent directors help to overcome the principal agent problem?


  Independent directors who do not have ties to management can act as a check on the decisions made by managers.

  They bring an outside perspective and can provide an oversight to ensure that management is acting in the best interest of shareholders.
• Give examples of hoe to align incentives?


  stock options or performance-based bonuses tht depend on the company’s profitability, growth, or other key metrics.
• Give examples of ways to increase transparency?


  A corporation can make its financial statements available to the public, hold regular meetings with shareholders, or provide detailed disclosures on executive compensation.
• What is an example of a way that appointing an independent director can help with the principal agent problem?


  A corporation can appoint a board member who has no prior relationship with the company or its executives and who has expertise in the relevant industry or field.
• What are the key reasons for businesses staying small?


  • retain service/premium - personable/customer loyalty/premium prices/USP
  • access to funding investment -> limited
  • retain control
  • keeping costs low -> avoid diseconomies of scale
  • autonomy
  • burden of excessive legal costs
  • maintain quality control
  • flexibility
  • avoid bureaucracy -> avoid attention from regulators
• What are the key reasons a business would want to grow?


  • more market power/influence
  • profit motive
  • ability to hire specialists and specialist managers
  • branding
  • achieve economies of scale
  • risk motive - links back to the behavioural aims of managers
  • diversity - larger variety of products/services -> more opportunity & going into different markets.
• What is divorce of ownership and control?

  Where the owner no longer makes day-to-day decisions.

  It leads to the principal agent problem.
• In the principle-agent problem, who is the principle and who is the agent?

  • Principle - owner of the business, who hires the agent
  • Agent - managers (e.g. sales or finance manager), who may have different business objectives
• Why may the principle and agent have conflicting views?


  They may have different objectives
• How to overcome the principle agent problem:


  • Employee share ownership schemes - John Lewis and Waitrose have a highly-regarded partnership model.
• What are the different types of growth?

  • Organic growth
  • Forward vertical integration
  • Backward vertical integration
  • Horizontal integration
  • Conglomerate integration