Unit 1.2

 Unit 1.2 - Understanding different business forms

Reasons for choosing different business forms and changing business forms -

Sole traders, Private limited companies, Public limited companies, Private and public sector organisations and non profit organisations such as charities and mutuals.

Sole traders - 

It is a business owned and run by one individual.

The owner may operate by themselves or employ other people.

Increasingly popular method because people enjoy working for themselves and keeping all of the businesses profits.

Business is unincorporated as it has not gone through the legal incorporation process and will have unlimited liability.

Unlimited liability - Owners of business are liable for all the debts that the business may incur (sole traders and partnerships) - If the business incurs debts that cannot be repaid the the owners personal assets are at risk as there is no limit to their liability.

Even though they only have one owner they are able to employ as many people as they want.

Easier to set up than other legal processes required to start up and the owner must only declare profits to HMRC ( Her Majesty's Revenue and Customs) to make sure that they pay the required level of income tax.

They may face many other pressures like an increased difficulty in gaining finance, high interest charges on any loans due to the increased risk of failure, only having a limited range of skills and workload pressures.

Limited companies -In an incorporated business, they have separate legal identity from the individual owners and this means they have limited liability.

Limited liability -  liability of owners of a business is limited to fully paid up value of the share capital (public and private limited companies)

Firm must go through legal 'incorporation' process to gain limited status and has to produce various legal documents like a Memorandum of Association and Articles of Association and has to register the business at the company house.

Resulting, in the organisation owning assets, owes money, employ staff and enters into contracts in its own right.

Owners of the business are known as shareholders.

Businesses like these include private limited companies and public limited companies.

Limited businesses allow the firm to raise money by selling shares. The individuals would be less willing to invest in a firm if their own personal assets were not protected against debts incurred by the firm.

Requires the company accounts to be checked annually by independent accountants and filed at companies house. For public limited companies these accounts will be available to the public who may wish to purchase shares and for existing shareholder to see how their company is performing. For private limited companies these accounts are only available to the existing or potential shareholders.

Shareholders are rewarded by the value of the shares increasing and payments known as dividends.

Dividends - A share in the profits of a company, distributed equally over each share. The amount of the profit paid to the shareholders is decided by the board of directors.

Private limited companies- 

A small to medium sized business, often run by the family or the small group of individuals who own it.

Shares cannot be sold without the agreement of the other shareholders and are not sold on the stock exchange

More capital can be raised by becoming a PLC but remaining an Ltd can help keep control of the firm and maintain a more long term perspective focused on growth instead of short term shareholder returns.

The accounts must be produced and filed at the companies house but are not available for the public to see.

Must have 'Ltd' after the company name.

Shares are sold to private individuals who are usually invited by the company to invest rather than the sale being advertised publicly.

E.G. Poundland, Iceland, Boots (bought and taken private in 2007)

Public limited companies -

Business with limited liability

Must share capital of over £50,000 at least two shareholders, two directors and a qualified company secretary as well as normally having a large number of shareholders.

Shares are traded publicly on the stock exchange. Shares in a company can be released at different times and the first time they are released is known as a IPO (initial public offering)

Company will have 'plc' after its name

Value is known as market capitalisation, total value of the issued shares of public limited company (current share price x number of share issued)

Unlike Ltds the shareholders can sell shares to whoever they like and this can lead to potential takeovers.

Main reason for becoming a plc is to gain access to much bigger sources of capita;. The shares are advertised and sold to the public, this gives the company better status. The share prices are reported through the press and online and will fluctuate depending on the success of the company.

Limited company may also make it easier to obtain bank loans as the company is considered less risky.

Often shareholders will want regular dividends which may mean the company focuses more on short term returns rather than on long term growth. At times this could lead to plc's putting profits before ethics.

E.G. Tesco, Kingfisher, ASOS, ARM

 Public and private sector organisations-

Public sector organisations are owned and ran by the government. 

Main objective will be to provide a service for the general public.

E.G. the National Health Service (NHS)

Private sector organisations are owned and ran by any private individual.

These types of firms will generally set as their main objectives to maximise sales and profit,

E.G. Tesco, Sainsbury's, Sony, Ford

Non profit organisations like charities and mutuals - 

Established for a particular social, community, environmental, welfare and cultural aims and objectives and not for financial gain.

Any of the profits made will be reinvested into the organisation to further its objectives. They will operate under different legal structures like charities and trusts.

Charities - Registered not for profit organisations with the main aim of raising money for a specific cause or purpose. E.G WaterAid, cancer research UK, save the children fund, Oxfam GB, RSPCA

Mutuals - Organisations owned by and ran for the benefit of their current and future members.

Main aim is to serve their members, normally customer and, or employees as well as often to contribute positively to society.

Take many forms including building societies, co operatives, friendly societies, mutual insurers, housing associations. clubs, employee owned businesses, credit unions, football supporters rusts and community mutuals. E.G Nationwide worlds largest building society.

Role of shareholders and why they invest - 

Shareholder owns a share in the organisation in which they have invested.

Might have a say in how the business is run by voting on some key issues, at the annual general meeting (AGM) or by post. This included issues like the election or removal of members of the board of directors or putting pressure on executives to ensure pay and bonuses are in line with the company's performance.

Amount of dividends paid is decided by the board of directors.

The board of directors are the highest level of management in a listed company and are appointed to get the best return on the investment for the shareholders.

Board members are either executive - often working in and running the business, or no executive members - not often working but appointed to make sure the company is run in the shareholders interest and ethically.

Shareholders buy shares so they might receive dividends and to potentially sell the shares at a profit in the future. If the company is successful and the shares increase in value.

Certain investors often buy shares to gain overrall control of a business and to become the majority shareholder which happens when 51% of the available shares of a company are owned by one individual or organisation.

E.G. The Glazier family's hostile takeover of Manchester United Football Club

Influence on share price and the importance of share price changes - 

Share price is the price of a single share in a company listed on the stock exchange. 

When a company does well it might pay out an equal share of a percentage of the company's total profit (dividends) to each shareholder.

Most shares offer income in the form of dividends which are normally paid twice a year. They can be seen as a reward for shareholders. They are paid when a company is profitable and has cash in the bank after it has satisfied al the necessary costs and debts.

The share prices are affected by two main factors: 

Performance of the company that has issued the shares

Wider business environment (external factors)

Listed companies announce their results twice a year and provide performance updates twice a year to give the investment community and insight into how they are performing.

Company must make regulatory announcements about any events which may influence their share price like the launch of new products or takeover bids.

Share price will rise and fall dependent on the company's performance due to the demand for shares.

External sources such as the press, specialist magazines, stockbroker reports and websites can affect it depending on what they write about the firm.

Share prices also are affected by the wider economic environment.

Divorce and ownership of control - 

Often in limited companies the owners of the company (shareholders) and the people who run it on a day to day basis (managers) will not be the same people.

Ltd: Shareholders more likely to be the managers

Plc: Shareholders and managers are normally different groups of people - creates divorce of ownership and control.

Very likely that owners and managers will have different objectives.

Summary - 

Firms legal structure will define the type of objectives it sets, the way it makes decisions and whether it focuses more on the short or long term in its strategies.

Determine how easy it is to raise finance but also the level of legal implications and public scrutiny they face.

Choose the right legal structure will ultimately be determined by the type of market the company is in, the structure of its rivals, the views of the existing owners and its need for external finance to implement its growth plans.