Section 2 Forms of Business Ownership

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Section 2 Forms of Business Ownership Powered By Docstoc
					Section 2
Forms of Business Ownership
Private enterprise system vs.
public enterprise

• Private sector - all business that are
  owned by individuals or groups of
  individuals and run essentially for profit.

• Public enterprise - business
  organizations that are owned
  by the government or
  some other public bodies.
Characteristics of private
enterprise system

1.   Private ownership

2.   Free choice

3.   Private profit

4.   Free competition
Sole proprietorship

• owned and controlled by a single
• the simplest, oldest and most easily
• many small businesses are initially set
  up in the form of sole trader

• Ownership

• Management

• Finance

• Unlimited liability

• Small size
Formation of sole trader

• to register with the Business
  Registration Office of the Inland
  Revenue Department

• pay an annual registration fee

• Ease of formation and dissolution

• Flexible management

• Sole claim on profit

• Favourable credit rating

• Preferential treatment by

• Limited size

• Unlimited liability for debts

• Uncertainty of continuity

• Limited management ability

• Partnership is an association of two or
  more persons to carry on as co-owners
  of a business for profit

• the amount of capital invested need not
  be the same for each partner
Characteristics of partnership

• 2 to 20 partners, except professional
• partners may contribute anything and is
  entitled to share profits and losses
• each partner shares equally in profits
  and losses unless other
  arrangements have
  been specified
Characteristics of partnership
• Any agreements in relations to ordinary
  course of business, bind all partners

• not a legal entity

• all partners have equal right in the
  management of the firm

• partners usually enter
  into an agreement
 Formation of partnership

• Deed of partnership, but not legally
• for general partnership, register with the
  business Registration Office
• for limited partnership, register with the
  Registrar of Companies
    Deed of partnership
• Name
• location and type of business
• period of time covered by the agreement
• amount and type of capital contributed
• methods of distributing profits and losses
• salaries, drawing accounts and interest
• powers and limitations of the
  partners in managing
• procedures for admission/
  withdrawal of partners
Advantages of partnership

• Multiple sources of capital

• diversification of management

• possibilities of growth and expansion

• improved credit rating

• preferential treatment by
Disadvantages of partnership

• Joint and unlimited liability

• conflict in authority and control

• lack of continuity

• frozen investment

• shared profits
• a limited company is a separate body in
  law from its shareholders and directors.
• the company may form contract, sue
  and be sued in its own name
• shareholders not liable for the company
  debts except for the value of their
Types of limited co.

• Private limited company

• public limited company
 Important features of private Ltd. Co.

• 1 to 50 shareholders
• usually small family concerns
• name must be registered and end with
  the word “limited”
• not allow to offer shares to the general
• shareholders may not sell
  shares without agreement
  of the other shareholders
Important features of public limited co.

• at least 2 shareholders, no upper limited

• shares can be traded openly in the
  stock market

• public limited co. is run by a Board of
  Directors elected by the
Formation of Ltd. Co.
• Name of the company
• Documents required:
  – Memorandum of Association
  – Articles of Association
Memorandum of Association

• The name of company
• The registered address
• The objective of the company, ie the
  types of activities it will engage in
• The capital of the company
Articles of Association

• The rights attached to the holding of
  various types of shares
• the roles and procedures for issuing and
  transferring shares
• The procedures and timing of company
• details of how accounts will be kept &
• The powers and responsibilities of the
• the details of how company officers will
  be appointed
• once accepted, a Certificate of
  Incorporation will be granted
• for public Ltd. Co. issue
  a prospectus
Preference shares

• Preference in payment of dividend and
  in repayment of capital

• no voting rights
Ordinary shares

• Receive dividends after the preference

• entitled to the remainder of the assets
 after the right of preference

• have voting right
Advantages of Ltd. Co.

• Limited liability
• ease of transferring ownership
• continuity of life
• specialized management
• large financial capability
• economies of scale
Disadvantages of Ltd. Co.

• Cost and difficulty of formation

• separation of ownership and control

• slower decision making

• legal restriction on activities

• lack of personal interest
Factors to be considered in choosing the form of business ownership

   • Type of business             • length of life
   • scope of operation           • Relative freedom
   • degree of direct               from government
     control                        regulation
   • degree of risk               • tax advantages
   • division of profit
• a business owned and operated for the
  benefits of its members

• small producers of goods or consumers
  may group together to
  form co-op for ……….
 Characteristics of co-op

• owners are called members
• each member has one vote
• profit is distributed to members as
  patronage dividends
• directors receive no salary
• interest on their investment
  is paid to members
Types of co-op

• Consumer co-op

• Producers’ co-op

• Marketing co-op

• Workers’ co-op
• A joint venture is an agreement
  between two or more businesses for the
  joint production and/or sale of a product
  or service.

• It is a temporary partnership

• a popular way to enter
  foreign markets
Advantages of joint-venture

• Less risk
• taking advantage of local expertise,
  business connection and relations
• better access to sources of raw
  materials and market
• taking financial advantages
Disadvantages of joint venture

  • Conflict over the operation
  • more logistics arrangement problem
  • more co-ordination problem
  • restricted government policy and
  • problem of profit-sharing
• A franchising is a licensing agreement that
  permits an individual to own his or her
  business while benefiting from the know-how,
  trademarks, and reputation of the established
• the franchisee pays an initial start-up fee, a
  royalty and sometimes an
  additional royalty for other
  functions, such as……..
Types of franchise

• Product franchise

• business-format franchise

• manufacturing franchise
Duties of franchiser

• Provide a certain amount of
  management training and assistance
• furnish goods to the franchisee
• advise on location of business and
• provide new employee training and
  retraining programme
• perform national
Duties of franchisee
• Operate the business according to the
 rules and procedures
• invest an agreed min. amount in the
• pay royalty
• buy supplies and other
 standard materials
Advantages of franchising

• Wide name recognition
• access to big business management
• lower costs
• lower risks
• financing
• training and support
Disadvantages of franchising

• Considerable start-up expense

• monthly payments to franchiser

• constraints on independence

• not guarantee success
Advantages to franchisor

• Reduce risk
• less investment required
• faster way to expand
• less management overhead
• greater incentive and motivation from
• Another source of income
• May achieve economies of scale
Disadvantages to franchisor

• Loss of control
• difficulty to maintain uniformity
• effect on franchisor’s image &
• future competitor
• Public ownership refers to organizations
  which are owned and operated by the
Reasons of setting up public enterprise

 • To avoid wasteful duplication

 • to set up and run services that might not
   be profitable

 • to gain the benefits of large scale

 • to protect employment

 • to control industries that
   are important to the country
Disadvantages of public ownership

• Lack of competition

• government may delay decision-making

• any losses must be paid for out of
Reasons for starting up a business

• Strive for achievement
• desire for independence
• from a hobby
• identify a gap (opportunity) in the
• financial incentive
• pushed into starting their
  own business
Factors to be considered in
starting business

• Personal background

  – education level

  – related business experience

  – personality

  – life style desired
• Choice of business line

  – personal interest

  – expertise

  – market demand
• Analysis of general business conditions
  – customers and market situation
  – suppliers
  – bankers and loan market in financing the
  – Government regulations
  – economic situation
  – political situation
  – technological situation
  – pollution protection
  – social cultural situation
Ways to set up a business

• Buy an existing business

• start a new business

• invest in a franchise
Factors to consider before you buy
a business

• To determine the track record
• to determine whether the owner is selling for
  the stated reason
• carefully inspect the premises and inventory
• examine the certified financial statements
• consult bankers, suppliers,
  clients, etc.
Advantages of buying into a

• Reduction of uncertainty

• generate quick profit for investors

• possession of necessary licenses and
Disadvantages of buying into a

• Difficult to make changes without risking the
  loss of goodwill from established customers
• inherit the previous owner creditors
• employees not meet your expectations, or
  vice versa
• previous owner may re-open early and lure
• facilities not in good condition

a new business
• The best-possible location can be selected
• physical facilities are modeled to the needs
• customer goodwill can be developed through
  one’s own policies and relationship
• staff can be selected and trained according to
  the needs of the business

• Higher risk because of lacking assured
• demands of capital and time are greater
• credit will take time to establish
• capital loans are more difficult to obtain
• more difficult to get and develop
  workable policies
• starting costs are high
Steps of starting a business
• Conducting a situation assessment
• developing an overall business plan
• projecting financial needs
• secured the needed sources and
• establishing internal control
• starting to serve customers
 Problems of setting up
 a business - internal
• How to combine and co-ordinate the
  four factors of production
• availability of finance and other
• type of ownership
• appropriate production scale
• available of suitable
 Problems of setting up
 a business - external

Challenge of
• economic environment
• technological environment
• social environment
• political and legal
• Define as one which is independently

 owned and operated and which is not

 dominant in its field of operation

• cannot be part of another

• Independent ownership
• independent operation and
• limited capital
• small employee size
      -- less than 50
• local operations
Contributions of small business
• 96% of manufacturing businesses are
  small business =>contribute much to GDP
• provide job opportunities
• introduce many new products
• complementary to larger business
• help to keep the economic
  system alive
• Flexible in management
• innovation and initiative
• profitable small opportunities are plentiful
• closer contact with the customers
• low overhead
• management can have a more direct
  profit impact
• personal contact with

• Inadequate management ability

• difficulties in access to capital

• high labour turnover

• poor competitive position
Causes of small business failure

• Economic factors
• lack of management skills
• difficulty in keeping good people
• aggressive competitors
• lack of economies of scale
• poor financing
Arguments for government to
support small business

• Promote more free competition
• create jobs and enhance the economic
• a long-term investment for Hong Kong
 as it help the technological
 development in the future
Arguments not to support
• A waste of resources if they fail to survive
  even with the government support
• protect the inefficient competitors
• increase the administrative load
• no specific forms of support
  is called to be effective
Trend towards bigness in

• Easier to attract investors

• able to produce on a large-scale
  Advantages of being big

• Can usually produce, purchase and
  distribute more efficiently
• inspire confidence in suppliers
• can spend more money in advertising
  and promotion
• most buyers select well-known brands
• have resources needed for
  the R&D and for entering
  new markets
• Can raise capital easily
• can reduce risks by extending the range
 of products
• may gain a monopoly position
Methods of growth

• Internal growth

• merger

• take-over
• a business with facilities in one or more
  countries other than its own that operate
  on a global basis by making
  management decision regarding profits,
  facilities, sales and services
  in many parts of the world
Features of MNC
• has significant operation in more than
  one country
• runs operations without much regard for
  national boundaries
• earn more profits and own more assets
  outside its home country
• to cope with very different environments,
  stages of economic
  development, and
• has to manage a workforce of many

  different nationalities and cultures

• has to bear high political risks
Importance of MNC

• Levels of employment

• political power

• foreign exchange

• technology development

• fully utilisation of resources
• has enormous economic and political
 power => may exert influence on host
• accused of exploiting the human and
 natural resources of host nations
• some industries in the host
 countries will be hurt by
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