Section 2 Forms of Business Ownership

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Section 2Forms of Business Ownership
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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 ownedby the government orsome other public
  bodies.

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Characteristics of private enterprise system

• 1. Private ownership
• 2. Free choice
• 3. Private profit
• 4. Free competition

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Sole Proprietorship
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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

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characteristics

• Ownership
• Management
• Finance
• Unlimited liability
• Small size

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Formation of sole trader

• to register with the Business Registration Office
  of the Inland Revenue Department
• pay an annual registration fee

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Advantages

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

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Disadvantages

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

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Partnership
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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

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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 otherarrangements havebeen specified

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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 enterinto an agreement

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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

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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 thepartners in
  managing
• procedures for admission/withdrawal of partners

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Advantages of partnership

• Multiple sources of capital
• diversification of management
• possibilities of growth and expansion
• improved credit rating
• preferential treatment byGovernment

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Disadvantages of partnership

• Joint and unlimited liability
• conflict in authority and control
• lack of continuity
• frozen investment
• shared profits

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Limited Company
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• 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

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Types of limited co.

• Private limited company
• public limited company

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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 sellshares without
  agreementof the other shareholders

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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 theshareholders

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Formation of Ltd. Co.

• Name of the company
• Documents required
• Memorandum of Association
• Articles of Association

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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

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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

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• The powers and responsibilities of the directors
• the details of how company officers will be
  appointed

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• once accepted, a Certificate of Incorporation
  will be granted
• for public Ltd. Co. issuea prospectus

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Preference shares

• Preference in payment of dividend and in
  repayment of capital
• no voting rights

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Ordinary shares

• Receive dividends after the preference
  shareholders
• entitled to the remainder of the assets after the
  right of preference shareholders
• have voting right

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Advantages of Ltd. Co.

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

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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

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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

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Co-operative
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• a business owned and operated for the benefits of
  its members
• small producers of goods or consumers may group
  together toform co-op for .

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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 investmentis paid to members

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Types of co-op

• Consumer co-op
• Producers co-op
• Marketing co-op
• Workers co-op

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Joint Venture
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• 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 enterforeign markets

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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

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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

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Franchising
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• 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 anadditional royalty for
  otherfunctions, such as..

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Types of franchise

• Product franchise
• business-format franchise
• manufacturing franchise

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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 nationaladvertising

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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 otherstandard materials

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Advantages of franchising

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

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Disadvantages of franchising

• Considerable start-up expense
• monthly payments to franchiser
• constraints on independence
• not guarantee success

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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

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Disadvantages to franchisor

• Loss of control
• difficulty to maintain uniformity
• effect on franchisors image reputation
• future competitor

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

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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 thatare important to the
  country

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Disadvantages of public ownership

• Lack of competition
• government may delay decision-making
• any losses must be paid for out oftaxation

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Setting up a business
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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 theirown business

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Factors to be considered in starting business

• Personal background
• education level
• related business experience
• personality
• life style desired

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• Choice of business line
• personal interest
• expertise
• market demand

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• 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

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Ways to set up a business

• Buy an existing business
• start a new business
• invest in a franchise

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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.

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Advantages of buying into a business

• Reduction of uncertainty
• generate quick profit for investors
• possession of necessary licenses andpermits

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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

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Start a new business
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Advantages

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

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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

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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 controlprocedures
• starting to serve customers

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Problems of setting upa 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 suitablepremises

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Problems of setting upa business - external

• Challenge of
• economic environment
• technological environment
• social environment
• political and legalenvironment

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

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characteristics

• Independent ownership
• independent operation and management
• limited capital
• small employee size -- less than 50
• local operations

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Contributions of small business

• 96 of manufacturing businesses are small
  business gtcontribute much to GDP
• provide job opportunities
• introduce many new products
• complementary to larger business
• help to keep the economicsystem alive

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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 withemployees

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disadvantages

• Inadequate management ability
• difficulties in access to capital
• high labour turnover
• poor competitive position

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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

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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 technologicaldevelopment in the future

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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 supportis called to be
  effective

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Trend towards bigness in business

• Easier to attract investors
• able to produce on a large-scale

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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 forthe RD and for
  enteringnew markets

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• Can raise capital easily
• can reduce risks by extending the range of
  products
• may gain a monopoly position

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Methods of growth

• Internal growth
• merger
• take-over

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• Discussion In recent years there has been a
  large number of business mergers and acquisitions
  with disappointing results. (2003/II/1)
• (a) What are the reasons for business mergers
  and acquisitions? (12 marks)
• (b) Suggest why the results of business mergers
  and acquisitions are often disappointing.
  (13 marks)

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(a) Reasons

• consolidation of facilities cost reduction and
  reduction of employment
• mutual advantages in the combination, e.g.
  complementary synergy, better utilization of
  resources (vertical integration)
• gaining scale economies
• entering new market/product/technology or
  enlarging market share (horizontal integration)
• risk diversification
• personal ambition of top management
• (3 marks for each reason) 12

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(b) reasons for companies failures

• companies do not fit well in culture
• the original objectives of both sides cannot be
  achieved
• the synergy effect is not significant or cannot
  be transferred
• overlapping resources
• strategy mismatch
• management conflicts
• (4 marks for each reason) 13

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Multi-national Company
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• 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
  servicesin many parts of the world

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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 economicdevelopment, andsystems

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• has to manage a workforce of many different
  nationalities and cultures
• has to bear high political risks

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Importance of MNC

• Levels of employment
• political power
• foreign exchange
• technology development
• fully utilisation of resources

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critics

• has enormous economic and political power gt may
  exert influence on host government
• accused of exploiting the human and natural
  resources of host nations
• some industries in the hostcountries will be
  hurt bymulti-nationals

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