Business Ownership
— Business Studies · Chapter 2: Business Structure & Ownership —
★ Exam Tip: Every definition on the board is a 2-mark "Define the term…" question (tagged K = knowledge). The teacher highlighted the key phrases in each definition — those are the marking words, so learn them exactly.
Chapter 2 — map of the chapter
| Topic | Areas covered |
|---|---|
| Business structure | Primary, secondary, tertiary & quaternary activity |
| Economic sectors | Private & public sectors → reasons and importance |
| Business ownership | Sole trader · Partnership · Private limited co. · Public limited co. · Franchise · Joint venture · Cooperatives · Social enterprises — each with + (advantages) and − (disadvantages) |
Key terms: primary, secondary, tertiary, quaternary · private sector · public sector · sole trader · partnership · franchise · private limited co. · public limited co. · joint venture · social enterprises · cooperatives · unincorporation · incorporation · unlimited liability · limited liability · flotation
Note: The board pages supplied start at business ownership. Economic sectors (primary → quaternary, private/public) and cooperatives are listed on the contents page but not shown on the board — add them from class if you need them.
1. Legal Structure & Business Format
Three names, one idea: legal structure ✓ · type of business organisation ✓ · business format ✓ ⇒ all together called Business Ownership.
Why form a legal structure?
- Legal formality → the law (the business must be set up as the law requires)
- Net of tax → which tax bracket the business falls in
- Access to finance → the sources the business can raise money from
The concept of unincorporation → unlimited liability
Unincorporation: the business and the owner have the same identity — in law they are one person.
unincorporation ⇒ unlimited liability
business runs up a debt
debt must be repaid — by the owner
owner's personal assets are at risk
2. Sole Trader
Same person, 3 names: sole trader = sole proprietor = owner — he runs it "forever alone".
Sole trader → sole proprietor → owner. (FOP = factors of production, i.e. the resources.)
Define the term 'sole trader' (2) · KAn individual who solely combines the FOP and takes a financial risk to start and manage the business.
He may or may not employ others.
- Examples: retail shops · mechanic · tailor
- Finance comes from: personal savings / borrowings
Advantages of a sole trader
- + No profit-sharing — keeps it all
- + He's his own boss
- + Quick decision-making
- + Easy to set up and manage → small-scale
↳ less finance is required
↳ less legal formalities - + Direct relationship with the customer
Disadvantages of a sole trader
- − No division of risk / loss
- − Less pool of finance
- − Lack of ideas → ineffective decisions
- − No sharing of responsibilities
- − Unincorporation → unlimited liability
- − Lack of continuity (business is tied to the one owner)
3. Partnership
Partnership → partners → owners (the partners are the owners).
Why form a partnership?
- Division of risk
- Lack of resources → finance
- Sharing of responsibilities
- Expertise / skills
Define the term 'partnership' (2)Is when a minimum of two and maximum of twenty individuals combine their resources (FOP) to start or form a business under a legal document — the 'Deed of Partnership'.
Deed of partnership → an agreement
The deed lists the elements the partners agree on:
1. Name of the partners
2. Capital / investment ratio
3. Profit and loss ratio
4. Salary assigned to partner
5. Responsibility areas → domain areas
2. Capital / investment ratio
3. Profit and loss ratio
4. Salary assigned to partner
5. Responsibility areas → domain areas
Grammar trick: conflicts between = two partners · conflicts amongst = more than two.
Writing all this down in advance avoids conflicts — "between" two partners, "amongst" more than two.
Advantages of a partnership
- + Division of risk / loss
- + More inflow of ideas → effective decisions
- + More pool of finance
- + Sharing of responsibilities → expertise / ideas
Disadvantages of a partnership
- − Profit-sharing
- − More legal formalities
- − Chances of conflict / disagreements
- − Slower decision-making
- − Unincorporation → unlimited liability
- − Lack of continuity
4. Private Limited Company (Pvt Ltd Co.)
Private limited company = Pvt Ltd Co. Typical route: Partnership → Pvt Ltd Co. — Reason? to reduce the personal risk.
Incorporation → limited liability
incorporation ⇒ limited liability
legal process → we distinguish / separate the owner's identity from the business
⇒ the business becomes a separate legal entity
owner's personal assets are NOT at risk
Pvt Ltd Company → issues shares → its owners are the shareholders.
Features of a private limited company
- Private → a friends / family company
- Up to 40 members (shareholders)
- Is not listed on the stock exchange
- Liquidation of shares is an issue ↳ hard to convert into cash (can't just sell on an exchange)
5. Public Limited Company (PLC)
Public limited company = PLC. Typical route: Pvt Ltd Co. → PLC — Reason? to raise more finance.
Two ways to raise that finance — ask a solicitor (advisor)
FlotationThe legal process of converting a Pvt Ltd Co. → PLC.
Flotation — steps
IPO (initial purchase offer) → PLC issues shares → shareholders buy → finance raised = share capital. (IPO is also called "initial public offering".)
Issue of shares — the catch: ① publishing cost (advertising & publishing the shares/accounts costs money) ② retaining control — owners lose some control to new shareholders.
Shareholders
Shareholders → the most important stakeholder. Shares = certificate of ownership → shareholders are the owners. Two things to know: their rights ✓ and their objectives ✓.
Right #1 → to get communicated
Mode of communication → Annual General Meeting (AGM): shareholders ⇄ board of directors / managers, plus the Annual Report, which contains:
- financial performance
- social accounting / social reports
- legal compliance
Right #2 → to vote / to elect
At the AGM → elections: shareholders participate → elect the Board of Directors → who appoint the Managers → who take control / decisions. The owners are not the ones running it:
Divorce between ownership / control — shareholders own the company, but managers control it day-to-day.
Shareholders' objectives
Objective = profit, earned in two ways:
- Dividend ↑ → the shareholder's share of profit / return on his investment in shares
- Capital gain → increase in share price
Shareholder X buys 1000 shares
2020: $10 × 1000 = $10,000
2021: $12 × 1000 = $12,000
capital gain = 12,000 − 10,000 = $2,000
Board shows the 2021 total as "$120000" (frame is cut off at the edge); 12 × 1000 = $12,000, so that is what's used here.
Features of a PLC
- Needs to publish its accounts / financial statements → loss of financial secrecy
- PLC needs to pay corporate tax
- Loss of retain control (owners lose control)
- Incorporated / limited liability
- More legal formalities / accountability / responsibility
- PLC is the strongest legal structure → finance
Equity financing vs Debt financing
Remember: equity = ownership (you give away a slice of the firm) · debt = liability (you owe it back).
| Equity financing ✓ | Debt financing | |
|---|---|---|
| PLC uses… | issue of shares | bank loan |
| Gives rise to | ownership | liability |
| Result | finance | finance |
| Return paid | dividend | interest |
| Nature of return | variable | fixed |
| Repayment? | no repayment | repayment (must be repaid) |
6. Social Enterprises
Break the term in two: Social → society. Enterprise → business (it needs risk-taking ability); the person is the entrepreneur → an individual.
enterprise = business
→ business activity
→ goods / services
→ sold at a selling price
→ revenue / profit
Define the term 'social enterprises' (2)Are entities involved in a commercial activity by offering goods / services through which they generate revenue / profit, but a major proportion is reinvested for welfare rather than maximising return to the owners / shareholders.
Not social enterprises ✗: Edhi, Saylani, JDC, Chhipa → these are welfare organisations / trusts that run on charity / donations. A social enterprise sells goods/services and earns revenue.
Examples (they sell something, and the profit goes to a cause)
- Al-Baik → KSA → fast food
- TOMS → US → footwear / eyewear
- Big-B magazine → retail price $1.5 → for homeless individuals = $0.85
Triple bottom line (a phrase / expression)
| Bottom line | Means | |
|---|---|---|
| Social | → | People |
| Environment | → | Planet |
| Financial | → | Profit |
(Board writes the third word as "price"; the standard expression is people · planet · profit.)
Where they fit: in the intersection of the private and public sector — a business like the private sector, with a social aim like the public sector.
Contribution of social enterprises to a country's development
- Creation of employment → income ↑ → standard of living (SOL) ↑
- Taxes to the govt → revenue ↑
- Fill the gap of NGOs
- Competition to the profit-motive businesses
7. Joint Venture
Joint venture → risk → start-ups → newly born businesses (a joint venture spreads the risk for new businesses).
Define the term 'joint venture'Is when two or a group of businesses unite together for a specific project over a period of time.
Key word: specific project (circled on the board) — it is for one project, not a permanent merger.
Examples
Advantages of a joint venture
- + Division of risk and loss
- + Sharing of resources / ideas / expertise
- + Co-branding
- + Can help in entering into new markets / segments
Disadvantages of a joint venture
- − Difference in culture / business practice → conflicts / disagreements
- − Profit-sharing
- − Negative image of any business can affect the project
8. Franchise
Franchise → an expansion strategy ✓ — local / national / international ✓ → expands through franchise outlets ✓ → the business must be well known / well reputed ✓.
Define the term 'franchise' (2) · KIs a legal right given by the franchisor to the franchisee to use the product / brand name against the financial return known as royalty (fixed, variable).
Royalty — variable vs fixed
Memory chain: Variable → vary → change. Variable royalty changes with sales; fixed royalty never changes.
Variable royalty → a % of sales (revenue), e.g. 10% of revenue. It changes when sales change.
Sales ↑
Sales = $50,000
royalty = 50,000 × 10%
royalty = $5,000
Sales ↓
Sales = $15,000
royalty = 15,000 × 10%
royalty = $1,500
Fixed royalty → a certain amount every time, whatever the sales. e.g. Ramadhan → sales ↑.
| Sales ↑ (Ramadhan) | Sales ↓ | |
|---|---|---|
| Sales | $50,000 | $15,000 |
| Variable royalty (10%) | $5,000 | $1,500 |
| Fixed royalty | $5,000 | $5,000 |
Takeaway: when sales fall, a fixed royalty still costs the franchisee the same ($5,000), but a variable one falls with sales ($1,500).
Why buy a franchise? — benefits to the franchisee
- + Customer base is already developed
- + Supplies will be provided by the franchisor
- + Less risk is involved
- + No staff training and development cost
- + No national marketing cost
- + No research and development cost
- + Experience and knowledge
Why sell a franchise? — benefits to the franchisor
- + Objective of expansion can be achieved
- + Coverage of geographical gap
- + Can achieve economies of scale
- + High upfront cost will be faced by the franchisee
- + Increase of market share / image
Why NOT buy a franchise? — drawbacks
- − No self-recognition (the brand is the franchisor's)
- − Centralised decision-making
- − High upfront and royalty cost
- − Any act by the franchisor can harm the franchisee financially
9. Quick Recap — Cheat Sheet
| Sole trader | Partnership | Pvt Ltd Co. | PLC | |
|---|---|---|---|---|
| Owner(s) | 1 (proprietor) | 2 – 20 partners | up to 40 shareholders | shareholders (public) |
| Legal status | unincorporated | unincorporated | incorporated | incorporated |
| Liability | unlimited | unlimited | limited | limited |
| Set up by | few formalities | Deed of Partnership | legal process | flotation (2 docs, govt, list) |
| Finance from | savings / borrowing | pooled by partners | shares to friends/family | share issue (IPO) or bank loan |
✓ Quick Recap — Business Ownership
- Unincorporated (sole trader, partnership): owner = business ⇒ unlimited liability, personal assets at risk
- Incorporated (Pvt Ltd, PLC): separate legal entity ⇒ limited liability, personal assets safe
- Partnership: min 2, max 20 · Deed of Partnership · conflicts between two / amongst more
- Pvt Ltd: friends/family · up to 40 · not on stock exchange · shares hard to convert to cash
- PLC: flotation → IPO → share capital · publish accounts · pay corporate tax · lose control
- Equity = ownership, dividend (variable), no repayment · Debt = liability, interest (fixed), repay
- Shareholders: rights (communication/AGM, vote/elect) · objectives (dividend, capital gain) · ownership ≠ control
- Social enterprise: sells goods/services, reinvests most profit in welfare · people · planet · profit
- Joint venture: 2+ businesses · specific project · limited time · shared risk & co-branding
- Franchise: franchisor sells right to brand · franchisee buys · pays royalty (fixed / variable)