FORMS OF BUSINESS OWNERSHIP OUTLINE Sole Trader Sole

FORMS OF BUSINESS OWNERSHIP OUTLINE Sole Trader (Sole Proprietor) Partnership Limited Companies: Private & Public Cooperative Joint-venture Franchise Public Enterprise 1) Characteristics 2) Procedures for their formation 3) Advantages & Disadvantages

TYPES OF BUSINESS OWNERSHIP

(I) Sole Proprietorships A) Characteristics • the oldest and simplest form • owned and controlled by ONE PERSON --> enjoys all the profits --> subjects to all the risks & losses ==> unlimited liability • not necessarily a one-person business • business is not a legal entity

(I) Sole Proprietorships B) Formation Procedures: • to obtain “Certificate of Registration” from the Business Registration Office of Inland Revenue Department • Registration fee: $2, 250 Examples of sole traders: • small retail stores in markets or shopping malls

(I) Sole Proprietorships C): Advantages 1. Ease of Organization • no professionals are required • few legal formalities • small amount of capital 3. Strong Profit Incentive • all profits belong to the owner 2. Lower Profit Tax • Profit Tax: --> Sole Proprietor: 15% --> Limited Company: 16. 5% 4. Flexibility in Management --> higher working incentive 5. Ease of dissolution • flexible to cope with the ever changing external environment 6. Secrecy • business can be terminated instantly once the liabilities of the business are repaid • business affairs can kept private except for completing tax return • free to make his own decision

(I) Sole Proprietorships D): Disadvantages 1. Unlimited Liabilities • if the business fails and make a loss --> owner: solely responsible for ALL the debts incurred 3. Lack of Continuity Q not a legal entity --> death/ retire of owner ==> lead to termination of business 5. Legal Status • owner bears all the legal responsibilities • business and its owner are inseparable in legal sense 2. Limited Size/ Expansion • owner lacks capital and may have difficulty in borrowing from banks 4. Management Difficulties • separation of management and ownership is not common • lack of division of labor

(II) Partnership A) What is Partnership? ? • defined as 2 -20 people who agree to provide capital and work together in business with the purpose of making profit --> more than 20 partners are allowed in the case of accountants, solicitors, etc • “ Partnership Agreement” : a written agreement signed by all the partners regarding their duties and rights

(II) Partnership Provision of Partnership Agreement D name of organization, address, business nature, information of partners D amount of capital attributed by each partner D distribution of profits & losses among partners D duties of each partner D authority to sign contract D conditions & procedures for dissolution of business

(II) Partnership A) What is Partnership? ? • defined as 2 -20 people who agree to provide capital and work together in business with the purpose of making profit --> more than 20 partners are allowed in the case of accountants, solicitors, etc • “ Partnership Agreement” : a written agreement signed by all the partners regarding their duties and rights B) Formation Procedures • similar to those for the sole trader • “Certificate of Registration”

(II) Partnership C) Types of Partnerships

(II) Partnership D) Comparison between different types of partners Remarks: Nominal Partner --> mainly for increasing company’s reputation

(II) Partnership D) Advantages & Disadvantages Advantages 4 Ease of Organization 4 Lower Profit Tax 4 More source of capital 4 Division of Labor Disadvantages 6 Unlimited Liability 6 Liability for partner’s mistake 6 Lack of Continuity 4 Share of Risk 6 Frozen Investment 4 Secrecy 6 Conflicts & Disagreements

(III) Limited Company A) What is Limited Company? ? • a business with legal status by which the shareholders are separated, in the legal sense, from the company • managed by “Board of Directors”: a group of people elected by shareholders, which makes all the important decision ABC Company Ltd. Profits Run by an elected Board of Directors Capital Shareholders Dividends 3 can raise finds through issuing shares 3 all shareholders have limited liabilities

(III) Limited Company B) 2 Types of Limited Company

Public Limited Company

Executive Director Advantages • Knowledge of company • Participate in decisions making • Attend Board meetings regularly • Better co-ordination Nonexecutive director Disadvantages • “yes man” • May lack wide management knowledge & skill Advantages: Disadvantages: • Valuable advice • Fresh viewpoint • Independent & not subordinate of the chairman • No interest in company • Out of touch • Rely on chief executive guidance • May not attend meeting regularly

(III) Limited Company C) Private Limited Company Vs Public Limited Comp

D) Formation of Limited Company Private Company Gives important information to the public about the company Public Company Companies Acts 1984 to 1986 Registrar of Companies Memorandum of Association States the internal rules of the company Miscellaneous Statement and Declarations Certificate of Incorporation Start trading Prospectus Issue share Trading certificate

Examples of Limited Company

(III) Limited Company E) Advantages Limited liability of shareholders Legal entity Separation of management & ownership Financial capability Continuity Ease of ownership transfer F) Disadvantages Difficult to set up Lack of secrecy Risk of losing control Lack of personal interest

OTHER FORMS OF BUSINESS OWNERSHIP (I) Co-operative • a non-profit-oriented organization --> aimed at providing services/products or striving for the benefit of its member • inactive in Hong Kong • 3 types of co-operatives: (1) Producers’ co-operative (2) Consumers’ co-operative (3) Loan co-operative

(II) Joint Venture (JV) ßa form of organization for international business in which a domestic company enters into a co-operation agreement (temporary) with a foreign company in order to accomplish a specific project Advantage s Synergy effect 3 Disadvantages 3 Lower risk 6 Logistic problem 3 Local expertise and assistance 6 Coordination problem 3 Technology transfer 6 Conflict over management 3 Favorable treatment by host countries 6 Problem of profit sharing 6 Less control

(III) Franchising ñ an agreement between an established successful company (franchiser) and investor (franchisee) éFranchisee is granted the right to do business in a prescribed manner set by the franchiser patent/ copyright/ trademark Franchiser royalties (a certain % of revenue) Franchisee

(III) Franchising 3 Types of Franchises: (1) licensed manufacturing franchise (2) licensed distributing franchise (3) business-format franchise

(III) Franchising For the Franchiser : For the Franchisee :

(IV) Public Enterprise A) What is a Public Enterprise? • an organization which is set up & owned by the government but its operations are separated from the government B) Features¢the government is the major shareholder ¢they put more emphasis on social aspects ¢they operate on general commercial principles ¢the government may provide financial support ¢their operation are separate from government administration

(IV) Public Enterprise C) Government Department Vs Public Corporation

(IV) Public Enterprise C) Government Department & Public Corporation

(IV) Public Enterprise D) Advantages ÙProvide essential services at a lower price ÙAccess to important information ÙReduce wastage of resources ÙEasy to raise capital E) Disadvantages þLack of entrepreneurship þLack of motivation þLack of flexibility þIncrease government burden