3.1.2 Understanding different business forms
Reasons for choosing different forms of business and for changing business form
Private = part of the economy that is not state controlled, and is run by individuals and companies, usually for profit
Public = this refers to all the businesses and organisations which are owned and run by the government
Factors affecting choosing business forms:
- Finances (including sources of)
- Size
- Taxes
- Profit (who shared with)
- Risks
- Ownership and control
- Registrations and payment
- Liability (limited and unlimited)
Unlimited Liability = 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
Limited Liability = the business has its own legal identity
| Strengths of a sole trader | Weaknesses of a sole trader |
| Don’t need to register anywhere (only have to tell HMRC) | Unlimited liability – can take personal possessions if the business goes into debt |
| Owner keeps all of the profits | Completely control (no other option) |
| Can’t sell shares so have complete control | Can’t sell shares so so extra money |
| Are their own boss – no arguments | Little start up capital to being with |
| Strengths of a private limited company | Weaknesses of a private limited company |
| Limited liability – can only take assets that belong to the business to pay off debts | Profits must be shared with the shareholders in the form of dividends |
| Own legal structure | Corporation tax |
| Can use lots of ways to raise finance | Have to pay to register the business |
| Strengths of a public limited company | Weaknesses of a public limited company |
| Limited liability – can only take assets that belong to the business to pay off debts | Profit must be shared with the shareholders in the form of dividends |
| Own legal structure | £50,000 raised money to register with the Companies’ House |
| Can use all types to raise finance | Corporation tax |
ADD IN TABLE ON THE DIFFERENT BUSINESS FORMS
The role of shareholders and why they invest
Shareholders = they are the owners of a limited company and they gain their financial reward from share ownership in two ways:
- 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
- Shareholders play an important role in the financing, operations, governance, and control aspects of a business
Shareholders in public companies whose shares are traded on the Stock Exchange have a daily insight into the returns their investment is making:
- The share price indicates the market value of the business (share price x number of shares in issue)
- The latest share price can be shown as a multiple of the most recent annual earnings (or profits) per share, to show a valuation ratio known as the Price/Earnings ratio
- The latest annual dividend can be compared with the share price to indicate an annual return (“dividend yield”)
Influences on share price and the significance of share price changes
Market Capitalisation = 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
Factors that affect share price:
- Number of shares available – the more shares that are available, the more people will want to invest in them
- Business expansion – shareholders will receive more dividends due to an increase in profit margins
- Investment – 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 decades significantly
- Publicity
- E-commerce
- A recession – this will devalue shares significantly
The effects of ownership on mission, objectives, decisions, and performance
A variety of factors affect the choice of business form which influences the ownership. This influences the firm’s mission & objectives and it’s decision making which impacts on performance
Mission and Objectives – depending on business form:
- Sole trader – achieve a work life balance
- PLC – pressure to maximise shareholder’ return
- NGO – focused on achieving social actions
Decision – who makes the decisions the speed these are made at:
- 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
Performance
- Measure success – financial, employee engagement, environmental record
- Sole trader – judge themselves on performance, criticised same as PLC
- Ownership affect – ability to employ specialist staff, access to finance, ability to maintain competitive advantage and embrace new tech