Welcome to "Forms of Business and Stakeholders"!
In this chapter, we are going to explore the different "legal outfits" a business can wear and the people who have a vested interest in what that business does. Think of a business form like choosing a character in a game—each has different strengths, weaknesses, and rules for how you win. We will also look at stakeholders, the people who are affected by every move the business makes. Let’s dive in!
1. Different Forms of Business
When someone starts a business, they have to decide on its legal structure. This decision affects who owns it, who keeps the profit, and who is responsible if things go wrong.
Sole Traders
A sole trader is an individual who owns and runs their own business. It is the simplest way to start. Examples include local hairdressers, plumbers, or freelance graphic designers.
- Control: The owner has total control and makes all decisions.
- Profits: The owner keeps all the profit after tax.
- Liability: They have unlimited liability. This is a big risk! It means if the business owes money, the owner is personally responsible. They could lose their house or car to pay business debts.
Private Limited Companies (Ltd)
An Ltd is owned by shareholders (often family and friends) and has its own legal identity. The "Limited" in the name is the most important part!
- Control: Owned by shareholders, but shares are sold privately (not on the stock exchange).
- Liability: Limited liability. If the business fails, shareholders only lose the money they invested. Their personal belongings are safe.
- Finance: Easier to raise money than a sole trader by selling shares to people they know.
Public Limited Companies (plc)
A plc is usually a very large business (like Tesco or Apple). Its shares are traded on a stock exchange, meaning anyone in the general public can buy a piece of the company.
- Control: Often a "divorce of ownership and control." Thousands of shareholders own it, but a Board of Directors runs it.
- Finance: Can raise massive amounts of capital by selling shares to the public.
- Transparency: Must publish detailed financial accounts for everyone to see.
Co-operatives and Social Enterprises
Not every business exists just to make the owners rich! Some have different goals:
- Co-operatives: Owned and run by their members (could be workers, customers, or producers). They share profits and decision-making power.
- 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 into their social mission rather than giving it all to owners.
Quick Review: Remember, Limited Liability is like a safety net for your personal bank account. Unlimited Liability means your personal stuff is on the line!
2. Comparing Business Forms: Key Issues
When comparing these forms, keep these five factors in mind:
- Control: Who makes the choices? (Sole trader = 1 person; Plc = Directors).
- Objectives: Is the goal to maximize profit, or to help the community?
- Sources of Finance: Can we borrow from a bank, use personal savings, or sell shares?
- Distribution of Profits: Who gets the "cake" at the end of the year?
- Liability: Is the owner's personal wealth at risk?
3. Shares and Shareholders
A share is a unit of ownership in a company. People buy shares for two main reasons: Dividends (a share of the profit) and Capital Gain (selling the share later for a higher price than they paid).
Share Price: What makes it go up or down?
The price of a share in a plc changes every day based on demand. If lots of people want the share, the price goes up!
- Company Performance: If profits are high, share prices usually rise.
- Market Conditions: If the economy is doing well, people feel confident buying shares.
- Interest Rates: If interest rates are high, people might save money in a bank instead of buying risky shares, causing share prices to fall.
Important Calculations (MathJax)
Don’t worry if math isn't your favorite subject—these formulas are straightforward! Just follow the steps.
Market Capitalisation: This is the total value of all the shares in a company.
\( \text{Market Capitalisation} = \text{Current Share Price} \times \text{Total Number of Shares Issued} \)
Dividends per Share: How much cash a shareholder gets for every single share they own.
\( \text{Dividend per Share} = \frac{\text{Total Dividend Pay-out}}{\text{Number of Shares Issued}} \)
Dividend Yield: This tells an investor how much "bang for their buck" they are getting as a percentage.
\( \text{Dividend Yield (\%)} = \left( \frac{\text{Dividend per Share}}{\text{Current Share Price}} \right) \times 100 \)
Key Takeaway: If a share price falls, it might be harder for a company to raise money in the future, and they might become a target for a "takeover" by a rival business.
4. Stakeholders
A stakeholder is anyone who has an interest in or is affected by a business. They are divided into two groups:
Internal Stakeholders (Inside the business)
- Employees: Want high wages and job security.
- Owners/Shareholders: Want high profits and dividends.
- Managers: Want to meet targets and get bonuses.
External Stakeholders (Outside the business)
- Customers: Want good quality products at fair prices.
- Suppliers: Want to be paid on time and get regular orders.
- Government: Wants the business to pay taxes and follow laws.
- Local Community: Wants jobs but doesn't want noise or pollution.
- Creditors (e.g., Banks): Want to be repaid any loans with interest.
Analogy: Imagine a local café. The owner (Internal) wants to raise prices to make more profit, but the customers (External) want lower prices. This is a Stakeholder Conflict. A business has to balance these different needs!
5. Ethical Responsibilities to Stakeholders
Businesses often face a choice: Profit vs. Ethics. Being ethical means doing the "right thing" even if it costs more money.
- To Employees: Paying a "Living Wage" instead of just the minimum wage.
- To Customers: Being honest about what is in the food or how a product was made.
- To the Community: Reducing plastic waste or donating to local charities.
Quick Review: Stakeholders aren't just people who own the business (those are shareholders). Stakeholders are anyone affected by it!
Common Mistake to Avoid:
Many students confuse Shareholders and Stakeholders.
- Shareholders are a specific type of stakeholder (they own part of the company).
- Stakeholders is the "umbrella term" for everyone (customers, workers, etc.).
Tip: All shareholders are stakeholders, but not all stakeholders are shareholders!
Summary Checklist:
- Can you explain the difference between a Sole Trader and a PLC?
- Do you understand why Limited Liability is safer for an owner?
- Can you calculate Market Capitalisation?
- Can you name three internal and three external stakeholders?