Different Ownership Different Ownership structures structures

OCR National Business Studies OCR National Business Studies

Level 2 /VGCSE Business Studies Level 2 /VGCSE Business Studies

Objectives Objectives

To understand the different ownership To understand the different ownership structure of businesses structure of businesses

To understand the advantages and To understand the advantages and disadvantages of different structures disadvantages of different structures

To understand the liability of each To understand the liability of each ownership ownership

To be able to give examples of businesses To be able to give examples of businesses with different ownership with different ownership

Different sectors Different sectors

PRIVATE PRIVATE PUBLICPUBLIC

Owned by private people Owned by private people Owned by the Owned by the Government /stateGovernment /state

Sole tradersSole traders NHS, Hospitals NHS, Hospitals Partnerships Partnerships Schools Schools CompaniesCompanies The army , the police The army , the police

etc.. (Ltd and Plc) etc.. (Ltd and Plc) FranchisesFranchises Co-operationsCo-operations

Sole Traders Sole Traders

Owned by one person.Owned by one person.Small size businesses.Small size businesses.Unlimited liability- this means that the Unlimited liability- this means that the

owner is liable for all his debts which owner is liable for all his debts which means that their personal assets can be means that their personal assets can be affected. affected.

The owner keeps all the profit. The owner keeps all the profit.

Sole traders- benefits Sole traders- benefits Easy to setup up as there are no formal procedures to Easy to setup up as there are no formal procedures to

follow; especially if using their own name follow; especially if using their own name Ideally suited for offering a person service to Ideally suited for offering a person service to

customers. customers. Decisions can be put into effect quickly as there is no-Decisions can be put into effect quickly as there is no-

one else to consult one else to consult The sole trader is his or own boss and does not take The sole trader is his or own boss and does not take

orders form anyone else orders form anyone else Bad (unpaid) debt can be avoided as the owners Bad (unpaid) debt can be avoided as the owners

usually know the customers and most transactions as usually know the customers and most transactions as made by cash and not credit. made by cash and not credit.

There is minimum paperwork unless the business is There is minimum paperwork unless the business is registered for VAT registered for VAT

Sole traders - disadvantagesSole traders - disadvantages

Long working hours Long working hours Illness and sickness cause problems – when the Illness and sickness cause problems – when the

business is closed the owner makes no money. business is closed the owner makes no money. Highly dependent up in skills and ability of one Highly dependent up in skills and ability of one

person.person. Difficult to raise capital to start up or expand the Difficult to raise capital to start up or expand the

business.business. The owner has unlimited liability for any debts. The owner has unlimited liability for any debts.

This means that if the business is un successful This means that if the business is un successful the owner may have to sell personal processions the owner may have to sell personal processions to pay for any debts. If some of the debts remain to pay for any debts. If some of the debts remain unpaid the owner may be declared bankrupt. unpaid the owner may be declared bankrupt.

Some facts about sole traders:Some facts about sole traders:

In the eyes o the law the sole trader and the In the eyes o the law the sole trader and the owner are one – you would sue the owner if owner are one – you would sue the owner if anything happened; e.g the hairdresser wrecked anything happened; e.g the hairdresser wrecked your hair. When the owner dies the business your hair. When the owner dies the business cease to exist cease to exist

Banks often reluctant to lend money – usually the Banks often reluctant to lend money – usually the owner has to pay their own money or borrow form owner has to pay their own money or borrow form family and friends family and friends

The sole trader can keep all the profit once the The sole trader can keep all the profit once the expenses are paid; the accounts are keep private. expenses are paid; the accounts are keep private.

Opportunities to grow are limited as difficult to Opportunities to grow are limited as difficult to raise extra capital. raise extra capital.

SMALL SCALE operations and does depend on SMALL SCALE operations and does depend on how ambitious the owner is. how ambitious the owner is.

Examples of sole traders Examples of sole traders

Examples includeExamples include – plumbers, – plumbers, hairdressers, beauticians , market traders, hairdressers, beauticians , market traders, Chinese restaurants’, catering outlets etc..Chinese restaurants’, catering outlets etc..

They o not need lager amount of money to They o not need lager amount of money to set up set up

Partnerships Partnerships Where 2- 20 people set up a business together. Where 2- 20 people set up a business together. They jointly one the business- the risk and responsibilities are They jointly one the business- the risk and responsibilities are

shared by all the partners. shared by all the partners. Usually setup with people with different skills to offer a wider Usually setup with people with different skills to offer a wider

range of service. range of service.

Sleeping partner are partners which have invested capital not Sleeping partner are partners which have invested capital not the business but do not have to involve themselves in the day the business but do not have to involve themselves in the day to day running of the business; they receive smaller share than to day running of the business; they receive smaller share than the active partners,. the active partners,.

Sensible to draw up a deed of partnership – sets out the details Sensible to draw up a deed of partnership – sets out the details for each partner ; their salary, their share of profits and for each partner ; their salary, their share of profits and procedures t follow if there is a dispute; The deed of partnership procedures t follow if there is a dispute; The deed of partnership act states that all partners are equally liable for nay debt unless act states that all partners are equally liable for nay debt unless it is stated differently in the deed. it is stated differently in the deed.

Partnerships – benefits Partnerships – benefits Problems can be shared and discussed.Problems can be shared and discussed. New skills and ideas can be introduced.New skills and ideas can be introduced. It is usually easier to raise capital as all the It is usually easier to raise capital as all the

partners contribute.partners contribute. There are obvious benefits t be gained form There are obvious benefits t be gained form

combining the skills and knowledge and the combining the skills and knowledge and the expertise of all the partners. expertise of all the partners.

The partners can specialise in their own The partners can specialise in their own particular area of expertise (e.g in legal practice, particular area of expertise (e.g in legal practice, one may specialise in family law, another in one may specialise in family law, another in litigation, s third in business law, and so on.litigation, s third in business law, and so on.

Partnerships – drawbacksPartnerships – drawbacks The partners may not always agree or contribute The partners may not always agree or contribute

equally. equally. The profits must be shared.The profits must be shared. All the partners must be consulted before s major All the partners must be consulted before s major

decision can be made. decision can be made. The partners have unlimited liability for any debts, and The partners have unlimited liability for any debts, and

are therefore personally liable.are therefore personally liable. The actions of one partner are binding on all the other The actions of one partner are binding on all the other

partnerspartners The death of a partner mean that the withdrawal of his The death of a partner mean that the withdrawal of his

share of capital must be paid to his/her estate. It is share of capital must be paid to his/her estate. It is therefore usual to take a life assurance policy on each therefore usual to take a life assurance policy on each partners life.partners life.

Partnerships - factsPartnerships - facts In the eyes of the law all the partners are equally responsible In the eyes of the law all the partners are equally responsible

for any debt for any debt Partners share the profits equally, unless different agreements Partners share the profits equally, unless different agreements

have been made specify in the Deed of Partnerships. have been made specify in the Deed of Partnerships. They all liable to pay income tax on the profits. They all liable to pay income tax on the profits. All the partners have unlimited liability for all the debt and the All the partners have unlimited liability for all the debt and the

accounts are still kept private accounts are still kept private In a limited partnership – rare in the UK ; then the sleeping In a limited partnership – rare in the UK ; then the sleeping

partner will have limited its debt only to the capital invested into partner will have limited its debt only to the capital invested into the business but the there partners will have to have unlimited the business but the there partners will have to have unlimited liability. liability.

Financing the business is easier and raising money for the Financing the business is easier and raising money for the business as there are more than one owners in the business. business as there are more than one owners in the business.

Examples include: accountants, solicitors, doctors, dentists, Examples include: accountants, solicitors, doctors, dentists, veterinary surgeons estate agents etc.. veterinary surgeons estate agents etc..

How are companies Formed How are companies Formed

There are two types of companies There are two types of companies LTD – Private Limited Companies LTD – Private Limited Companies PLC – Public Limited companies PLC – Public Limited companies

How are companies formedHow are companies formed

Memorandum of associationMemorandum of association – the structure of the – the structure of the new company its purpose and aims and objectives new company its purpose and aims and objectives

Article of associationArticle of association – there rule book of how it – there rule book of how it should operate- what the business can and cannot do. should operate- what the business can and cannot do.

This mean the company is issued with a This mean the company is issued with a certificate of certificate of incorporationincorporation – a birth certificate for the company. – a birth certificate for the company.

Corporation tax is paid on net profits! Corporation tax is paid on net profits! Easier to borrow money. Easier to borrow money. All the profit belongs to the shareholders but some is All the profit belongs to the shareholders but some is

ploughed back to be re invested into the business. ploughed back to be re invested into the business.

Companies Companies

Has a Has a separate legal identityseparate legal identity – which means – which means that the company has separate legal entity that the company has separate legal entity and is known as a corporate body – the and is known as a corporate body – the company has been incorporated. ‘inc’ id the company has been incorporated. ‘inc’ id the abbreviation for this. The company owns the abbreviation for this. The company owns the property, employs and pays its staff (including property, employs and pays its staff (including the directors), take legal action and is the directors), take legal action and is responsible for its debts. In the eyes of the law responsible for its debts. In the eyes of the law it is a separate individual. it is a separate individual.

E.g. in Tesco if you break your ankle you sue E.g. in Tesco if you break your ankle you sue Tesco not the shareholdersTesco not the shareholders

Private limited companiesPrivate limited companies Start out as maybe small sole trader sand or partnership. Start out as maybe small sole trader sand or partnership. They form a limited company: They form a limited company: Improve the financial security as the owner are called Improve the financial security as the owner are called

shareholders and have limited liability which means they are shareholders and have limited liability which means they are limited to only the amount invested into the business.limited to only the amount invested into the business.

The name Ltd stands for private limited companiesThe name Ltd stands for private limited companies The company goes into ‘liquidation’ if the business fails and The company goes into ‘liquidation’ if the business fails and

there is no bankruptcy. there is no bankruptcy. Before lending money to the company they need to be sure the Before lending money to the company they need to be sure the

business is financially sound. business is financially sound. Ltd provides a better image to their customers as they assume Ltd provides a better image to their customers as they assume

it is more secure. it is more secure.

Private Limited CompanyPrivate Limited Company

LTDLTD – each shareholder receives shares – each shareholder receives shares in the business in the business

One share equals one vote One share equals one vote

So shareholders with more than half the So shareholders with more than half the shares can outvote the other shares can outvote the other shareholders. shareholders.

Ltd Benefits to the owner: Ltd Benefits to the owner: Business can stay small- minimum one director and one Business can stay small- minimum one director and one

shareholdershareholder The owners are the shareholders and have a vested The owners are the shareholders and have a vested

interest in the business success and are involve din interest in the business success and are involve din running the business. running the business.

Relatively easy to setup – owners may only need to invest Relatively easy to setup – owners may only need to invest 100 to 200 pounds100 to 200 pounds

Shares can be transferred with the agreement of all the Shares can be transferred with the agreement of all the shareholders and cannot be sold to the public. This gives shareholders and cannot be sold to the public. This gives the owners direct control over the business.the owners direct control over the business.

Banks are more willing to make loans to a limited company Banks are more willing to make loans to a limited company – especially if it has a good financial track record. – especially if it has a good financial track record.

Because of limited liability. Because of limited liability. The accounts are sill private between the owners, their The accounts are sill private between the owners, their

accounts and the Inland Revenue. accounts and the Inland Revenue.

Ltd – drawbacks Ltd – drawbacks It is not possible to sell shares to the general public to raise It is not possible to sell shares to the general public to raise

additional finance.additional finance. Limited companies have to comply with more regulations than Limited companies have to comply with more regulations than

sole traders or partnerships, for instance they have to register sole traders or partnerships, for instance they have to register the Registrar of Companies and have their accounts audited by the Registrar of Companies and have their accounts audited by an accountant. Thy also have to commit to the requirements of an accountant. Thy also have to commit to the requirements of various Companies Acts. various Companies Acts.

A limited company is not allowed to trade under the name of an A limited company is not allowed to trade under the name of an existing company as this will lead to confusion between the existing company as this will lead to confusion between the suppliers or customers. suppliers or customers.

If the company ceases trading it must be officially ‘wound up’ If the company ceases trading it must be officially ‘wound up’ and the if the company cannot pay its debts it will go in to and the if the company cannot pay its debts it will go in to liquidation which can be time consuming and a difficult process liquidation which can be time consuming and a difficult process

Plc – Public Limited CompaniesPlc – Public Limited Companies Largest type of privately owned businesses in the UK. Largest type of privately owned businesses in the UK. Many started out as privately limited companies and were Many started out as privately limited companies and were

floated on the Stock Exchange. floated on the Stock Exchange. Floated means when the public Limited Company is launched. Floated means when the public Limited Company is launched. Any person can buy shares into the business and is identified Any person can buy shares into the business and is identified

with the letters PLC with the letters PLC The shareholders are different to the directors. The directors The shareholders are different to the directors. The directors

can choose to own shares in the business or not. can choose to own shares in the business or not. A company must have more than £50,000 before it can ‘go A company must have more than £50,000 before it can ‘go

public’ and must have a satisfactory financial record. public’ and must have a satisfactory financial record. Also it needs enough people to be interested in buying the Also it needs enough people to be interested in buying the

shares for it to have a successful floatation shares for it to have a successful floatation

Plc – Benefits Plc – Benefits

Major benefit is increased capital as many thousands Major benefit is increased capital as many thousands of people or organisations may buy shares into the of people or organisations may buy shares into the company. This makes expansion very easy.company. This makes expansion very easy.

Some public limited companies can be quite small- Some public limited companies can be quite small- there only needs to be a minimum of two directors and there only needs to be a minimum of two directors and two shareholders. two shareholders.

Very large companies can often operate cheaply than Very large companies can often operate cheaply than small companies on economies of scale. For instance, small companies on economies of scale. For instance, they can mass-produce goods for sale and buy in bulk they can mass-produce goods for sale and buy in bulk to save money. to save money.

If the company is successful, the shares will increase If the company is successful, the shares will increase the overall value of the company. the overall value of the company.

Plc - DrawbacksPlc - Drawbacks A public company must be registered as such with the A public company must be registered as such with the

Registrar of Companies and many external regulations Registrar of Companies and many external regulations to comply with. to comply with.

Any problems the company encounters may become Any problems the company encounters may become news if the press run a story on it. news if the press run a story on it.

An annual general meeting (AGM) must be held each An annual general meeting (AGM) must be held each year and all shareholders must be invited. year and all shareholders must be invited.

Shareholders who do not agree with the way the Shareholders who do not agree with the way the company is run may raise objections or vote against a company is run may raise objections or vote against a proposal made by specific directors. proposal made by specific directors.

Specific accounts must be prepared each year and Specific accounts must be prepared each year and these must be audited. Moreover the accounts must these must be audited. Moreover the accounts must be published so tat a ‘problem year’ cannot be hidden. be published so tat a ‘problem year’ cannot be hidden.

Plc – drawbacks 2 Plc – drawbacks 2

Shareholders invest to receive dividend payments in Shareholders invest to receive dividend payments in return for their investment. return for their investment.

They will want the shares to increase in value and if They will want the shares to increase in value and if they decrease in value shareholders will be tempted to they decrease in value shareholders will be tempted to sell their shares. In this case their interest is different sell their shares. In this case their interest is different to those f directors who may be looking at the longer to those f directors who may be looking at the longer term security of the company. term security of the company.

The The original owner(s) may lose most of the controloriginal owner(s) may lose most of the control of the company, even if they retain substantial number of the company, even if they retain substantial number of the shares. Sir Richard Branson bought his of the shares. Sir Richard Branson bought his company back from the public ownership because of company back from the public ownership because of this. this.

Some facts about Plcs Some facts about Plcs Legally a public limited company is owned by Legally a public limited company is owned by

shareholders- so its ownership may change all shareholders- so its ownership may change all the time as shares are bought and sold all the the time as shares are bought and sold all the time. time.

A PLC has to comply with Companies acts as A PLC has to comply with Companies acts as well as abide by the rules set out by the stock well as abide by the rules set out by the stock exchange. exchange.

It can choose a variety of source of finance, form It can choose a variety of source of finance, form banks to debentures ( loans on the stock banks to debentures ( loans on the stock exchange by selling additional shares) – there is exchange by selling additional shares) – there is limit on how many shares it can sell depending limit on how many shares it can sell depending on the value of the company. on the value of the company.

Facts about Plc (2) Facts about Plc (2) A plc may take over another company by buying up A plc may take over another company by buying up

share in a smaller company – just to give it controlling share in a smaller company – just to give it controlling votes. Or it may merge with another company of similar votes. Or it may merge with another company of similar size to grow bigger.size to grow bigger.

The net profit is paid out to the shareholders in the form The net profit is paid out to the shareholders in the form of a dividend, although the company will put a proportion of a dividend, although the company will put a proportion into reserves each year. (preference shareholders into reserves each year. (preference shareholders receive a fixed amount each year) The dividend depend receive a fixed amount each year) The dividend depend upon how much profit is made and how much is required upon how much profit is made and how much is required for reserve. for reserve.

Examples of Plc include; Barclays Bank, Marks and Examples of Plc include; Barclays Bank, Marks and Spencer’s, Sainsbury etc.. Spencer’s, Sainsbury etc..

Ownership of both businessOwnership of both business

What are they? Ltd or plc What are they? Ltd or plc What is their liability?What is their liability?How did they become companiesHow did they become companiesWhat is the advantages/ disadvantages of What is the advantages/ disadvantages of

being a LTD to B’ham Airport being a LTD to B’ham Airport Also list the advantages and Also list the advantages and

disadvantages of lex being a plc disadvantages of lex being a plc Use case study to describe the ownershipUse case study to describe the ownership