Section 2 Forms of Business Ownership Private enterprise

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 individual • the simplest, oldest and most easily formed • many small businesses are initially set up in the form of sole trader

characteristics • 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

Advantages • Ease of formation and dissolution • Flexible management • Sole claim on profit • Favourable credit rating • Preferential treatment by government

Disadvantages • Limited size • Unlimited liability for debts • Uncertainty of continuity • Limited management ability

Partnership • 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 partnership • 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 required • 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 Government

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 shareholdings

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 public • 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 shareholders

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 meetings • details of how accounts will be kept & recorded

• The powers and responsibilities of the directors • 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 shareholders • entitled to the remainder of the assets after the right of preference shareholders • 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 • scope of operation • degree of direct control • degree of risk • division of profit • length of life • Relative freedom from government regulation • tax advantages

• 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 bureaucracy • 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 firm • 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 design • provide new employee training and retraining programme • perform national advertising

Duties of franchisee • Operate the business according to the rules and procedures • invest an agreed min. amount in the business • pay royalty • buy supplies and other standard materials

Advantages of franchising • Wide name recognition • access to big business management skills • 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 franchisee • Another source of income • May achieve economies of scale

Disadvantages to franchisor • • Loss of control difficulty to maintain uniformity effect on franchisor’s image & reputation future competitor

• Public ownership refers to organizations which are owned and operated by the government

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 production • 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 taxation

Reasons for starting up a business • Strive for achievement • desire for independence • from a hobby • identify a gap (opportunity) in the market • 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 business – 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 business • Reduction of uncertainty • generate quick profit for investors • possession of necessary licenses and permits

Disadvantages of buying into a business • 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 customers • facilities not in good condition

Start a new business

Advantages • 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

Disadvantages • Higher risk because of lacking assured customers • 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 permits • establishing internal control procedures • 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 resources • type of ownership • appropriate production scale • available of suitable premises

Problems of setting up a business - external Challenge of • economic environment • technological environment • social environment • political and legal environment

• Define as one which is independently owned and operated and which is not dominant in its field of operation • cannot be part of another business

characteristics • Independent ownership • independent operation and management • 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

Advantages • • • 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 employees

disadvantages • 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 performance • 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 business • 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 systems

• 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

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

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