The Legal Structure of Business

1. The Legal Structure of Business

2. DO NOW • Terms and definitions hand out complete.

3. Sole Trader • A business in which one person provides the permanent finance. • They have full control of the business • Keep all the profits. • Unlimited Liability – the owners personal possessions and property can be taken to pay for the debts off the company. • Common business types – hairdressers, builders, retail shops etc

4. Partnerships • A business formed by two or more people to carry on business together, with shared capital investment and usually shared responsibilities. • Can have any number of partners (not usually more than 20-30) • Unlimited Liability • Business debts and errors are felt by all partners. • Most Partnerships have an agreement detailing what each partners rights, responsibilities and profits are. • Common Business – Law and accounting firms

5. Group Activity • In groups of 4-5 you have the advantages and disadvantages of being a sole trader, put them under there correct heading advantages or disadvantages. (10 mins)

6. Advantages – Sole Trader • Owner keeps all profits. • Owner maintains full control of the business. • They are relatively uncomplicated to set up and the process is not costly.

7. Disadvantages – Sole Trader • Unlimited liability • Knowledge and skills are limited • Only one owner to provide finance for the business which restricts growth. • It can be hard to borrow money (or interests rates are high) as small businesses are considered risky by lenders. • All the responsibility for the losses falls on the sole owner.

8. Advantages - Partnership • More owners to provide capital so it is easier to grow/expand • Having many owners means more connections to helpful people (networking) • Each partner can specialize in a part of the business • More ideas and skills

9. Disadvantages - Partnerships • Usually have unlimited liability. Note that in some countries sleeping partners (or silent partners) may request limited liability as they are not involved in running the business • Partners may disagree on decisions (conflicts and compromises) • If one partner dies the partnership is dissolved (finished) • Partners must share the profit • Limited to 20 owners (In some countries) • In some countries (including NZ) each partner can be held responsible for all the debts ‘joint and severable liability’

10. A case for Business Partnership • Read the case study and answer the questions that follow. (15 mins)

11. Homework • Activity 2.1 page 21 • Blog Duty –Student to discuss today's lesson, others to check and comment

12. DO NOW • Homework essay please hand in.

13. Homework Answer • Forming a partnership would increase the finance available for expansion and enable the business more easily to fund the Accountancy firm ie (office space etc). • There would be less reliance on debt finance to fund expansion. Borrowing money from Financial institutions increases the costs of the business, as interest must be paid on all borrowing.

14. Homework Answer • Jesse is unsure whether he would be able to undertake all of the management responsibilities for the expanded business. Danielle may be able to fulfil these responsibilities and may also bring skills to the business that Jesse lacks. • A partnership is easy to set up, requiring no legal formalities to be completed. However, Jesse would be advised to draw up a Deed of Partnership if he proceeds

15. Homework Answers • Jesse will continue to have unlimited liability and, moreover,will be responsible for the decisions that his new partner(s) make(s). All partners are bound by the decisions of any one of them. If he were to form a company, then he would benefit from limited liability. • He will have to share profits with his new partner(s). • if He wishes to leave the business to his sons. However, there is no continuity with a partnership as it is dissolved on the death of any one of the partners. Knowledge 2 Application 2 Analysis 3 Evaluation 3

16. Limited Companies • The owners are called shareholders. • You purchase shares within an organization you could purchase 1 but usually in blocks i.e. 15000 shares. • Shareholders receive a dividend payment proportional to there shareholding. • The company is a separate legal entity from the shareholders meaning the shareholders personal assets cant be touched if business fails.

17. Private Limited Company • A small to medium sized company that is owned by shareholders often from the same family they cannot sell shares to the public. • DE Group • www.degroup.co.nz

18. Advantages • The company has a separate legal entity from the owner, which results in limited liability. • The original owners can keep control as long as they don’t sell too many shares. • Many shares could be sold to gain money or finance. • Unlike partnerships, if the owner dies the company continues normally.

19. Disadvantages • You can only buy or sell shares with the permission of all the other shareholders. • Legal costs to set up can be significant in some countries. UK companies must prepare ‘Memorandum of association’ (Rules of the company) and ‘Articles of association’ (Details of the company). Note, in NZ setting up a private company is quite easy and cheap. • Companies must also file their annual financial reports with the Registrar of companies (A government department) • As more owners join the business the existing shareholders start to lose control.

20. Public Limited Company • A limited company, often a large business, with the legal right to sell shares to the general public – share prices are quoted on the national stock exchange eg Air New Zealand, Fletcher Building

21. Advantages • The selling of more shares to the public provides massive amounts of owners investment • Limited Liability

22. Disadvantages • As ownership becomes more and more diluted, control over the business is lost. It is possible for other shareholders to vote against the original owners even voting them off the Board of Directors (Divorce of ownership from control). • Note: Anyone could be a shareholder so it may be possible for a rich buyer to buy more and more shares on the stock exchange until they own the majority of the company. This may happen beyond the control of the original owners. • The stock exchange has stringent standards which public companies must meet in order to be listed. If companies no longer achieve these standards they may be removed from the exchange. • Annual Financial reports are available to all shareholders and members of the public. Secrecy is reduced. Even the competition may easily obtain these reports.

23. Footie Limited • Activity 2.2 Page 24 Questions 1,2,3,4,5,6

24. Footie Limited Q 1 • Answers may refer to: • • There is greater disclosure of financial information with a public limited • company (plc). A limited company must send its accounts to Companies • House, whereas a plc must also publish its accounts. • • A plc is listed on the stock exchange and, therefore, it is easy to buy and sell • shares. In contrast, it is more difficult to buy and sell shares in a limited company. • • A plc can raise capital more easily as it is able to issue a prospectus and off er shares • to the public. In contrast, a limited company cannot sell shares to the general public.

25. Footie LTD Q2 • The text refers to Footie Ltd’s planned ballot of the owning family; therefore, it is in the private sector as it is owned by shareholders. Businesses in the public sector are owned and controlled by the state.

26. Footie LTD Q3 • Footie Ltd operates in both the secondary and the tertiary sector. • The business is in the secondary sector as it manufactures shoes in its own • factories. Its involvement in the secondary sector has declined in recent years; it • is implied in the case material that Footie Ltd is outsourcing the manufacture of • shoes to firms in Asia. • Footie Ltd is also in the tertiary sector as it is a retailer and wholesaler, owning • or franchising some 650 shops.

27. FOOTIE LTD Q4 • To maintain current shareholder control of the business Footie Ltd is a long-established family business. It is likely that the directors are shareholders and have decided that along with the other shareholders they wished to retain control of the future direction of the business. In a plc there is a greater divorce between ownership and control. If Footie Ltd became a plc, then the threat of takeover would be greater than it currently is. Existing shareholders had already rejected a takeover when the business was in decline; now that the business has recovered, and profits are rising, they may believe that, financially, they are better off maintaining the status quo.

28. Q4 Continued • Need to raise finance • As the company has ‘no need of further capital to fund further expansion’, there would be little incentive to pursue a public flotation with its attendant costs. A public flotation is usually motivated by a need to raise capital.

29. Q5 • Benefit to the business • It would raise more capital. This could be used to expand the firm more rapidly and consolidate its position as the largest conventional shoe brand in the world. There would be no need to use debt finance for expansion. Borrowing increases gearing and means that the business has more debt to service (pay interest on). This increases the risk to the business if there is an economic downturn as the interest will still have to be paid.

30. Q5 cont • Benefit to existing shareholders • It will be easier to sell shares that are held and realize a capital gain. This would enable shareholders to release their wealth into a more liquid form. If shareholders held on to their shares, then they could benefit from a rapidly increasing share value if Footie plc used the capital effectively.

31. Q6 – Footie Ltd • Reduced reliance on own manufacture − Footie Ltd has moved production of its shoes from its European factories to factories in lower-cost countries. Lower costs of production will have enabled Footie Ltd either to become more price competitive, thus increasing sales, or to increase profit margins. • Investment in brand − this may have enhanced their brand image, which could enable them to increase profit margins on sales. It could also develop greater brand loyalty amongst customers leading to greater repeat purchase of products and a willingness to pay relatively higher prices. • Investment in shops − this may have improved the shop environment, gaining Footie Ltd a competitive edge and increasing sales due to more satisfied consumers. • Change in focus toward being a retailer first and foremost rather than a manufacturer and a retailer − it is possible that Footie Ltd has focused on its core strength as a retailer, thus enabling the business to grow and become more profitable. Footie Ltd is now ‘expanding rapidly in nearly all markets’.

32. Homework • Activity 2.2 page 24 4,5 and 6 • Blog Duty –Student to discuss today's lesson, others to check and comment

33. DO NOW • List three advantages and disadvantages of public and private limited companies.

34. Legal Formalities • Memorandum of association – name of the company, address and the maximum share capital of the organization. • Articles of association – this document covers the internal workings and control of the business. Ie names of directors.

35. Other forms of business • Cooperatives – A large group of people owning an organization i.e. Fonterra owned by 14000 farmers. This helps with economies of scale as they can often buy in bulk to produce. Other examples food stuffs. • Cooperatives share the profits.

36. Franchises • A business that uses the name, logo and systems of a successful business ie subway, MacDonald's and body shop. • http://www.youtube.com/watch?v=vaTHDa5jqDI

37. Joint Ventures • Two or more businesses work together on a particular project and create a separate division to do so.

38. Holding Companies • A business organization which owns and controls a number of businesses, but doesn't unite them into one unified company. • I.e. Fletcher building

39. Public Sector Enterprises • A business enterprise owned and controlled by the state. • Generally make a profit. • Government interferes in decision making for political reasons. • NZ examples would Be…

40. Activity – Water Babies • Read article and answer questions.

41. Homework • Question 5 and 6 page 37 Business Studies text book. • Blog Duty –Student to discuss today's lesson, others to check and comment