4

Types of business organisation

Revision answers
1 a) Public limited company: able to raise the large sums needed for expansion
through the sale of shares to the public.
b) Sole trader: he probably does not want the legal complexity of a company
and needs little capital so a partnership is unnecessary.
c) Public corporation: needs government finance and has social objectives so
government will probably want to own/control this business.
d) Partnership: no other legal structure is possible for them.
e) Private limited company: he wants continuity for his business and he will
want his son to benefit from limited liability.
2 i) Have to share profits.
ii) Share decision making; may have disagreements.
3 i) Limited liability: will not put his own personal assets at risk, other than those
invested in the business.
ii) Status: the business will appear to have greater status and will have more
continuity than a sole trader business. This could be important to some
suppliers.
4 i) Loss of management control.
ii) Accounts disclosure.
iii) May be subject to takeover bids.
5 Public sector comprises organisations such as public corporations owned and
controlled by government.
Public limited companies are in the private sector, with shares owned by private
individuals or other companies.
6 i) Share finance and risks of new business.
ii) Enter a new market using a foreign company already located there.
7 Public limited companies are often managed by professional directors who are
not the (main) owners. Shareholders might want profits paid out in dividends
but directors might want to retain profits for expansion.
8 A licence that is purchased from a franchisor, giving the franchisee the right to
use name, logo, marketing methods, and so on, of the business.
9 a) Advantage: own boss, able to take all decisions, such as which meals to sell;
no capital needed for franchise.
Disadvantage: he will have to find capital to promote and market the
business himself as his name will not be well known.
b) Tom: he will be able to use a well-known brand name and this should get his
business off to a good start.
Franchisor: less expensive to sell franchise licence than to open its own
branch/store; Tom takes many of the risks of opening the new branch.
10 i) Government financed: will not have to use advertising revenue to raise
finance so more time for programmes!
ii) Some programmes may be made that are not profitable but appeal to
certain small sections of society.

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 4 Types of business organisation

Answers to activities
Activity 4.1
a) Advantages: independence able to work for himself and make own decisions;
may become very successful as this is an expanding industry.
Disadvantages: less security than working for a large business; no experience of
owning/operating a business so this increases the risk of failure; putting his small
savings at risk and all other assets if it fails.
b) Students own answer.
c) Advantages: increased capital; uncle has business experience.
Disadvantages: uncle might insist on some management role but he knows
nothing about computers; Amin may lose the independence he was hoping for.

Activity 4.2
a) Advantages: limited liability there is still a risk of business failure even though
it seems to have been successful; additional capital from sale of shares to
friends needed for new premises.
Disadvantages: legal formalities and some disclosure of accounts: Amin might
not want his uncle to find out how much profit he is making! Friends may have
some control over the business depending on number of shares bought: Amin
will have to explain his business decisions to them.
b) Students own answer.

Activity 4.3
a) It protects the individual shareholders private assets if the business fails: he/she
will only lose their investment in the companys shares.
b) Makes it easier: potential investors will be more likely to buy shares
knowing that their liability, in the event of business failure, is limited to their
investment.
c) Sole traders often value their independence, ability to take their own quick
decisions and being able to keep all profits: these advantages will be lost by
taking on partners.
d) They wanted to get back full control of their company and decision making and
objective setting within it; they did not want to take the risk of shares being
bought by another company and being taken over; they wanted less disclosure
of the accounts.

Activity 4.4
a) When businesses agree to create a new business together to achieve a particular
objective, for example, entering a new market.
b) Bharti Enterprises will know the Indian market, for example, consumer tastes
and local competitors.
There may also be legal constraints on foreign businesses setting up in the
Indian retail industry.
c) Lack of knowledge of local consumer tastes, market trends, legal restrictions and
local culture.
Distance from operations in other countries, for example, transport costs.

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 4 Types of business organisation

Sample answers to exam-style

questions Paper 1
1 a) A person who owns his/her own business and controls it on his/her own.
b) i) Partnership
ii) Private limited company
Other answers are possible.
c) i) He enjoys independence. Jameel does not like taking orders.
ii) He will be able to keep all of the profits. He has lost his job so needs a
regular income.
d) i) Lack of capital. He has limited savings and he will need to pay for shop
premises.
ii) No experience in operating his own shop/business working in one is
not the same and it closed down anyway so this might suggest a risky
venture which could put all his assets at risk.
e) Yes: able to expand more quickly than opening new branches himself; capital
might still be limited as he has not been in business long; gets his business
names more widely known; capital injection from franchisees.
No: rapid expansion may be difficult for him to control; success of his
business will now depend on skills of franchisees.
Overall conclusion/judgement needed.
Sample answers to Question 2 on the Teachers CD-ROM.

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