3.1.2 Understanding different business forms

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Reasons for choosing different forms of business a

Sole trader: individal who owns + operates own business. May be 1/2 employees, but individual makes all final decisions. Only one that benefits financially from business, but also must face burden of failure. In eyes of law, individual and business are one entity, therefore unlimited liability. Most common form of legal structure in UK. Common w/ trades eg plumbers, builder, car mechanics etc. No formal rules to follow or administrative costs to pay. 

Main disadvantages: unlimited liability,  limited sources of finance available, long working hours, difficulty of running business during periods of ill health

Partnerships: 2 or more people start a business w/o forming company. Also have unlimited liability, therefore if business is in debt, comes out of individuals own money and assets as well as business funds. Partners must trust each other because of this. Legal structure often found in professions eg medicine and law. Main difference between sole trader and partnership is number of owners

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Reasons for choosing different forms of business a

Advs: 
 - shareholders experience benefits of limited liability eg confidence to expand
 - able to gain access to wider range of borrowing opportunities eg shares on stock market or to family and friends

Disadvs: 
 - must make financial info public on Companies House. Small firms not required to do this, but have to reveal more than sole trader or partnetship
 - have to follow more, and more expensive, rules than unlimited liability businesses eg producing audited accounts and holding AGM of shareholders - add several thousands of pounds to annual costs

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Reasons for choosing different forms of business a

Can be a start-up - start-up capital = £100 - can be wholly owned by entrepeneur, or other people can be brought in as investors. 

Shares can't be bought/sold on stock market or w/o agreement of other directors - between friends and family - trusted people. 

Legal requirement to have Ltd after name to warn those dealing w/ business that the firm is relatively small and has limited liability. B/c of limited liability, risk that "cowboy" businesspeople might start company, run it into ground then walk away from debts - cheques not as secure as ones from an unlimited liability business

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Reasons for choosing different forms of business a

When an ltd expands to point of having share capital of more than £50,000, can convert to plc.

Shares can be floated on stock market, increasing company's access to share capital, enabling it to expand considerably - plc will appear after name

Publish far more detailed acounts than ltds

Process of converting from ltd to plc can be difficult - floating onto stock market provides sudden, huge injection of cash, forcing firm to try and grow more quickly than usual steady rate of 10-15%/year

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Reasons for choosing different forms of business a

Co-operatives: can be worker owned or customer owned - eg John Lewis/Waitrose. Have potential to offer more united cause for workforce than profit of shareholders. Jointly owned and democratically controlled by the people who use the service, work there, or live there

Not-for-profit organisations: Mutual businesses - have no shareholders and no owners. Exist for best interests of members
 Charities - status ensures those who fun the charity are not liable for any devts. Provides significant tax benefits

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Reasons for choosing different forms of business a

Private: All aforementioned businesses operate in private sector, meaning they are not owned by the state; neither by national nor local government

Public: Owned by the state, therefore may have different obligations and pressures. 
 - Public corporations: government-owned businesses that trade mainly w/ private sector. Most have now been sold to private sector, forming a private monopoly eg Thames Water. 
 - Local authority services: Only recently public. Public sector provision of health care was prices below the private sector level or might even be free. 
 - Private-public partnerships: Gov decided to promote the idea that public services will be more efficient if tun in partnership w/ private. -> Private Finance Initiative, in which private sector finance was used to initiate public sector investment in hospitals, school or transport

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Issues with different forms of business

Unlimited and limited liability: Limited - only business can be sued eg if business sells faulty item. Important if liquidation - nobody can be sued, so consumers have to be wary when dealing w/ small, limited liability businesses. Same for when business selling on credit to other businesses - can write off debts to creditors, yet remain in control of business - can lead to bankruptcy, as Game did in 2012 (able to do this since 2002 - 'pre-pack administration')
- Unlimited - as business and owner seen as one entity, can lose everything - have to be very frugal/careful with finances, otherwise can end up in huge amount of personal debt

Ordinary share capital: company issues shares in exchange for investor's share capital. Shareholders expect annual dividend as reward for further investment, but if business has bad trading year, can choose to drop dividend - unhappy shareholders

Market capitalisation: value stock market places on whole business by multiplying share price by number of issues shared. Represents starting point for any company considering making takeover bid

Dividends: annual reward to shareholders for investing in business. Trade-off - higher dividend payout agreed, lower amount of retained capital available for investors

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The role of shareholders

Own share of business proportionate to their shareholding, eg if an individual has 10 shares in a company that has issued 100 shares at 1% stake, then they own 10% of the company and have 10% voting rights at AGM (usually only attended by handful of shareholders) 

For company, role of shareholder to provide the capital to get the business going and to keep it growing; the point of share ownership is the degree of influence it gives and the rewards it provides. 

Should be proactive, raising important issues w/ board of directors, but usually not interested and only bought shares in hope or price rise or rising dividends. 

Have right to question board of directors at AGM on any aspect of company performance or policies

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Why shareholders invest - rewards

Two main financial rewards:
 - annual dividend payments
 - a rise in value of shares

Annual dividend payouts decided by company directors when they know final figure for profit for the year. Most have clearly expressed dividend policy, and are received in proportion to shareholdings

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Influences on share price

The profit after tax the company makes (earnings) x value investors place on those earnings

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Significance of share price changes

No ST impacts - share capital of business invested permanently by investors, therefore if lose confident in business and no longer want their shares, they need to find another buyer rather than demanding the money back from the business

LT, share price can be very significant. If share price high, relatively easy and cheap to obtain more share capital. A business can carry out a rights issue which gives existing shareholders the right to buy more shares at a discount to the market value. If share price low and remains low, company unlikely to be able to raise any extra share capital - more difficult to raise loan capital

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The effects of ownership on mission, objectives, d

Most large companies plcs and have large number of outside sharehodlers with little care for the business. Have to report latest profits every six months, therefore becomes a fixation for chief executives. Needs time to come up with successful new trading strategy

Problem - whatever mission statement says, staff will soon learn real priorities of business. Those who want to move further up the "career ladder" are most likely to understand real mission rather than stated one, and will work towards this - where career possibilities lie. Must also understand real objectives of business and the real timescale rather than the stated ones, which affects decision-making. 

Need to rise above ST pressures and come up with a sound LT strategy -> success. Keep eye on ST performance, which can become a deadweight on shoulders of business

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