Forms of business and stakeholders

Welcome to Your Guide on Business Forms and Stakeholders!

Hi there! Whether you're dreaming of starting your own side hustle or aiming to run a massive corporation one day, this chapter is for you. We are going to explore the different "shapes" a business can take and look at all the different people who have a "stake" in how that business performs. Don't worry if it seems like a lot of legal jargon at first—we'll break it down using everyday examples to make it stick! By the end of these notes, you'll be an expert at identifying which business form fits which situation.

1. Different Forms of Business

Just like people choose different outfits for different occasions, entrepreneurs choose different legal structures for their businesses depending on their goals, how much risk they want to take, and how much money they need.

The Sole Trader

This is the simplest form of business. It is owned and run by just one person. Think of your local hairdresser, a freelance photographer, or a plumber.

• Control: You are the boss. You make 100% of the decisions.
• Profits: You keep all the profit after tax.
• Liability: This is the scary part. You have unlimited liability. This means the law sees no difference between you and the business. If the business owes money, you could lose your personal house or car to pay the debts.

Private Limited Companies (Ltd)

An Ltd is often a small to medium-sized business. The owners are called shareholders, and shares are usually sold privately to family and friends.

• Liability: These owners have limited liability. Imagine a legal "wall" between the owner and the business. If the business fails, the owner only loses the money they invested in the shares, not their personal belongings.
• Control: Usually controlled by the original founders.

Public Limited Companies (plc)

These are the big names you see on the news (like Tesco or Apple). Their shares are traded on the Stock Exchange, meaning anyone in the general public can buy a piece of the company.

• Finance: They can raise huge amounts of money by selling millions of shares.
• Risk of Takeover: Because anyone can buy shares, someone could buy enough to take over the whole company!

Co-operatives and Social Enterprises

Not every business is just about making the owner rich!

• Social Enterprises: These are businesses that trade to tackle social problems or improve the environment. They make a profit, but they reinvest most of it back into their "mission" (e.g., The Big Issue).
• Co-operatives: These are owned and run by their members. This could be workers (worker co-op), customers (consumer co-op), or producers (producer co-op). Everyone has a say in how it's run.

Quick Review:
• Sole Trader = Easy to set up, but risky (unlimited liability).
• Ltd = Private shares, protected by limited liability.
• plc = Public shares, can grow very large.
• Social Enterprise = Profits used for a good cause.

Memory Aid: Think of "Limited" as "Limited Risk." You only lose what you put in!

2. Key Issues: Comparing Business Forms

When you are comparing these forms in an exam, always think about these five "pain points":

1. Control: Who makes the decisions? (Sole trader = 100%, plc = Board of Directors).
2. Objectives: Is the goal to make profit, or to help the community?
3. Sources of Finance: Can we get a bank loan, or do we need to sell shares?
4. Distribution of Profits: Does one person keep it all, or is it split as dividends to thousands of shareholders?
5. Unlimited vs Limited Liability: This is the most important legal distinction!

Common Mistake to Avoid: Don't assume "limited liability" means the business can't fail. It just means the owner's personal wealth is safe if it does.

3. Shares and Share Prices

For Ltds and plcs, the business is divided into shares. People buy shares for two main reasons:
1. Dividends: A share of the company's profits paid out to them.
2. Capital Gain: Buying a share at £1 and selling it later for £2 when the company is more successful.

What influences share prices?

Share prices go up and down like a rollercoaster based on:
• The Economy: If the country is doing well, people spend more, and profits go up.
• Company Performance: If a company announces a huge new invention, everyone wants their shares, so the price rises.
• Market Conditions: What are competitors doing? Is the industry growing or shrinking?

Key Takeaway: A falling share price is bad news because it makes it harder to raise money and makes the company a target for a takeover.

4. The "Business Math": Calculations You Need to Know

Don't let the numbers scare you! There are three simple formulas you might need to use:

Market Capitalisation

This is the total "value" of a company on the stock market.
\( \text{Market Capitalisation} = \text{Current Share Price} \times \text{Total Number of Shares Issued} \)

Dividends per Share

This tells you how much cash a shareholder gets for every single share they own.
\( \text{Dividends per Share} = \frac{\text{Total Dividend}}{\text{Number of Shares Issued}} \)

Dividend Yield

This tells you how good the "return" is on your investment compared to the current price.
\( \text{Dividend Yield} = \left( \frac{\text{Dividend per Share}}{\text{Current Share Price}} \right) \times 100 \)

Analogy: Imagine you buy a house for £100,000 and rent it out for £5,000 a year. The "Yield" is 5%. Dividend yield is just the "rent" you get for owning a share!

5. Stakeholders

A stakeholder is anyone who has an interest in or is affected by a business. It's like a giant web where the business is in the center.

Internal Stakeholders (Inside the building)

• Owners/Shareholders: They want high profits and high share prices.
• Employees: They want good wages, job security, and a safe place to work.

External Stakeholders (Outside the building)

• Customers: They want good quality products at a fair price.
• Suppliers: They want to be paid on time and have regular orders.
• The Community: They want local jobs but don't want noise or pollution.
• Government: They want the business to follow laws and pay taxes.
• Creditors (Banks): They want to make sure the business can pay back its loans.

Stakeholder Conflict

Businesses often face ethical dilemmas because different stakeholders want different things. For example:
• To increase profit (what shareholders want), a business might cut wages (which hurts employees).
• To lower costs, a business might use cheaper materials that cause pollution (which hurts the community).

Did you know? Modern businesses are moving away from just "Shareholder Value" (making owners rich) towards "Stakeholder Mapping," where they try to keep everyone happy to ensure long-term success.

Key Takeaway Summary:
1. Choosing a business form involves balancing control, finance, and liability.
2. Limited liability is a massive advantage for growth.
3. Share prices reflect how the public perceives a company's future.
4. Stakeholders have conflicting needs, and a successful business must manage these relationships ethically.

Great job! You've finished the notes for this section. Take a quick break and then try a practice calculation for Dividend Yield to see if you've got it!