Different Ownership structures

1. Different Ownership structures OCR National Business Studies Level 2 /VGCSE Business Studies

2. Objectives • To understand the different ownership structure of businesses • To understand the advantages and disadvantages of different structures • To understand the liability of each ownership • To be able to give examples of businesses with different ownership

3. Different sectors • PRIVATE PUBLIC Owned by private people Owned by the Government /state • Sole traders NHS, Hospitals • Partnerships Schools • Companies The army , the police etc.. (Ltd and Plc) • Franchises • Co-operations

4. Sole Traders • Owned by one person. • Small size businesses. • Unlimited liability- this means that the owner is liable for all his debts which means that their personal assets can be affected. • The owner keeps all the profit.

5. Sole traders- benefits • Easy to setup up as there are no formal procedures to follow; especially if using their own name • Ideally suited for offering a person service to customers. • Decisions can be put into effect quickly as there is no-one else to consult • The sole trader is his or own boss and does not take orders form anyone else • Bad (unpaid) debt can be avoided as the owners usually know the customers and most transactions as made by cash and not credit. • There is minimum paperwork unless the business is registered for VAT

6. Sole traders - disadvantages • Long working hours • Illness and sickness cause problems – when the business is closed the owner makes no money. • Highly dependent up in skills and ability of one person. • Difficult to raise capital to start up or expand the business. • The owner has unlimited liability for any debts. This means that if the business is un successful the owner may have to sell personal processions to pay for any debts. If some of the debts remain unpaid the owner may be declared bankrupt.

7. Some facts about sole traders: • In the eyes o the law the sole trader and the owner are one – you would sue the owner if anything happened; e.g the hairdresser wrecked your hair. When the owner dies the business cease to exist • Banks often reluctant to lend money – usually the owner has to pay their own money or borrow form family and friends • The sole trader can keep all the profit once the expenses are paid; the accounts are keep private. • Opportunities to grow are limited as difficult to raise extra capital. • SMALL SCALE operations and does depend on how ambitious the owner is.

8. Examples of sole traders • Examples include – plumbers, hairdressers, beauticians , market traders, Chinese restaurants’, catering outlets etc.. • They o not need lager amount of money to set up

9. Partnerships • Where 2- 20 people set up a business together. • They jointly one the business- the risk and responsibilities are shared by all the partners. • Usually setup with people with different skills to offer a wider range of service. • Sleeping partner are partners which have invested capital not the business but do not have to involve themselves in the day to day running of the business; they receive smaller share than the active partners,. • Sensible to draw up a deed of partnership – sets out the details for each partner ; their salary, their share of profits and procedures t follow if there is a dispute; The deed of partnership act states that all partners are equally liable for nay debt unless it is stated differently in the deed.

10. Partnerships – benefits • Problems can be shared and discussed. • New skills and ideas can be introduced. • It is usually easier to raise capital as all the partners contribute. • There are obvious benefits t be gained form combining the skills and knowledge and the expertise of all the partners. • The partners can specialise in their own particular area of expertise (e.g in legal practice, one may specialise in family law, another in litigation, s third in business law, and so on.

11. Partnerships – drawbacks • The partners may not always agree or contribute equally. • The profits must be shared. • All the partners must be consulted before s major decision can be made. • The partners have unlimited liability for any debts, and are therefore personally liable. • The actions of one partner are binding on all the other partners • The death of a partner mean that the withdrawal of his share of capital must be paid to his/her estate. It is therefore usual to take a life assurance policy on each partners life.

12. Partnerships - facts • In the eyes of the law all the partners are equally responsible for any debt • Partners share the profits equally, unless different agreements have been made specify in the Deed of Partnerships. • They all liable to pay income tax on the profits. • All the partners have unlimited liability for all the debt and the accounts are still kept private • In a limited partnership – rare in the UK ; then the sleeping partner will have limited its debt only to the capital invested into the business but the there partners will have to have unlimited liability. • Financing the business is easier and raising money for the business as there are more than one owners in the business. • Examples include: accountants, solicitors, doctors, dentists, veterinary surgeons estate agents etc..

13. How are companies Formed • There are two types of companies • LTD – Private Limited Companies • PLC – Public Limited companies

14. How are companies formed • Memorandum of association – the structure of the new company its purpose and aims and objectives • Article of association – there rule book of how it should operate- what the business can and cannot do. • This mean the company is issued with a certificate of incorporation – a birth certificate for the company. • Corporation tax is paid on net profits! • Easier to borrow money. • All the profit belongs to the shareholders but some is ploughed back to be re invested into the business.

15. Companies • Has a separate legal identity – which means that the company has separate legal entity and is known as a corporate body – the company has been incorporated. ‘inc’ id the abbreviation for this. The company owns the property, employs and pays its staff (including the directors), take legal action and is responsible for its debts. In the eyes of the law it is a separate individual. • E.g. in Tesco if you break your ankle you sue Tesco not the shareholders

16. Private limited companies • Start out as maybe small sole trader sand or partnership. • They form a limited company: • Improve the financial security as the owner are called shareholders and have limited liability which means they are limited to only the amount invested into the business. • The name Ltd stands for private limited companies • The company goes into ‘liquidation’ if the business fails and there is no bankruptcy. • Before lending money to the company they need to be sure the business is financially sound. • Ltd provides a better image to their customers as they assume it is more secure.

17. Private Limited Company • LTD – each shareholder receives shares in the business • One share equals one vote • So shareholders with more than half the shares can outvote the other shareholders.

18. Ltd Benefits to the owner: • Business can stay small- minimum one director and one shareholder • The owners are the shareholders and have a vested interest in the business success and are involve din running the business. • Relatively easy to setup – owners may only need to invest 100 to 200 pounds • Shares can be transferred with the agreement of all the shareholders and cannot be sold to the public. This gives the owners direct control over the business. • Banks are more willing to make loans to a limited company – especially if it has a good financial track record. • Because of limited liability. • The accounts are sill private between the owners, their accounts and the Inland Revenue.

19. Ltd – drawbacks • It is not possible to sell shares to the general public to raise additional finance. • Limited companies have to comply with more regulations than sole traders or partnerships, for instance they have to register the Registrar of Companies and have their accounts audited by an accountant. Thy also have to commit to the requirements of various Companies Acts. • A limited company is not allowed to trade under the name of an existing company as this will lead to confusion between the suppliers or customers. • 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 liquidation which can be time consuming and a difficult process

20. Plc – Public Limited Companies • Largest type of privately owned businesses in the UK. • Many started out as privately limited companies and were floated on the Stock Exchange. • Floated means when the public Limited Company is launched. • Any person can buy shares into the business and is identified with the letters PLC • The shareholders are different to the directors. The directors can choose to own shares in the business or not. • A company must have more than £50,000 before it can ‘go public’ and must have a satisfactory financial record. • Also it needs enough people to be interested in buying the shares for it to have a successful floatation

21. Plc – Benefits • Major benefit is increased capital as many thousands of people or organisations may buy shares into the company. This makes expansion very easy. • Some public limited companies can be quite small- there only needs to be a minimum of two directors and two shareholders. • Very large companies can often operate cheaply than small companies on economies of scale. For instance, they can mass-produce goods for sale and buy in bulk to save money. • If the company is successful, the shares will increase the overall value of the company.

22. Plc - Drawbacks • A public company must be registered as such with the Registrar of Companies and many external regulations to comply with. • Any problems the company encounters may become news if the press run a story on it. • An annual general meeting (AGM) must be held each year and all shareholders must be invited. • Shareholders who do not agree with the way the company is run may raise objections or vote against a proposal made by specific directors. • Specific accounts must be prepared each year and these must be audited. Moreover the accounts must be published so tat a ‘problem year’ cannot be hidden.

23. Plc – drawbacks 2 • Shareholders invest to receive dividend payments in return for their investment. • They will want the shares to increase in value and if they decrease in value shareholders will be tempted to sell their shares. In this case their interest is different to those f directors who may be looking at the longer term security of the company. • The original owner(s) may lose most of the control of the company, even if they retain substantial number of the shares. Sir Richard Branson bought his company back from the public ownership because of this.

24. Some facts about Plcs • Legally a public limited company is owned by shareholders- so its ownership may change all the time as shares are bought and sold all the time. • A PLC has to comply with Companies acts as well as abide by the rules set out by the stock exchange. • It can choose a variety of source of finance, form banks to debentures ( loans on the stock exchange by selling additional shares) – there is limit on how many shares it can sell depending on the value of the company.

25. Facts about Plc (2) • A plc may take over another company by buying up share in a smaller company – just to give it controlling votes. Or it may merge with another company of similar size to grow bigger. • The net profit is paid out to the shareholders in the form of a dividend, although the company will put a proportion into reserves each year. (preference shareholders receive a fixed amount each year) The dividend depend upon how much profit is made and how much is required for reserve. • Examples of Plc include; Barclays Bank, Marks and Spencer’s, Sainsbury etc..

26. Ownership of both business • What are they? Ltd or plc • What is their liability? • How did they become companies • What is the advantages/ disadvantages of being a LTD to B’ham Airport • Also list the advantages and disadvantages of lex being a plc • Use case study to describe the ownership