Chapter 3Forms of Business Ownership
Short Questions
B1C03T2Q001eng
Why do most multinational corporations choose to go public and become public limited companies? (4 marks)
Answer:
Public limited companies can issue shares to the public. It is also easier for them to obtain loans from banks and make purchases on credit because of their higher creditworthiness. More capital can support the large-scale operations of multinational corporations. (2 marks)
The separation of ownership and management enables the company to get specialists to take up different roles. This improves the management and efficiency of the company. (2 marks)
B1C03T2Q002eng
Suggest three ways that an SMEcancompete with amultinational corporationby taking advantage of its characteristics. (6 marks)
Answer:
SMEs can be more innovativeand introduce new products to attract customers.
SMEs should keep their operations flexible so that they can make changes promptly. Their flexibility can enable them to adapt to rapid changes in the market.
SMEs should maintain close relationships with their customers. They can customisetheirproducts or services to the individual needs of their customers in order to provide better services to them.
SMEs can select a specified group of customers (niche market) and tailor their products and services to cater for their needs.
(Any three of the above, 2 marks each)
B1C03T2Q003eng
Identify the differences between an ordinary shareholder and a preference shareholder.
(6 marks)
Answer:
Ordinary shareholder / Preference shareholderDividends / Depends on company’s profits / Fixed / (2 marks)
Preference to receive dividends / No (after preference shareholder) / Yes / (2 marks)
Voting rights / Yes / No / (2 marks)
B1C03T2Q004eng
How has the government enhanced the operational efficiency of public enterprises in recent years? (6 marks)
Answer:
The government has outsourced more and more of its public services to private enterprises. As these private enterprises usually specialise in the production of goods and services, their operational efficiency is higher.
Some government departments are now operating on a self-financing basis under trading funds. This gives the departments a higher degree of flexibility in resource management. The departments are more ready to respond to market changes, thus improving efficiency and service qualities.
The government has simplified the structure of some departments by integration and reorganisation. As a result, the efficiency of these departments has been enhanced.
The government has privatised some public enterprises. These enterprises are no longer wholly owned by the government after privatisation. After privatisation, these enterprises will not receive any support from the government. They must operate on a commercial basis just like private enterprises. In order to make a profit, they have to improve their products and services. Moreover, they should enhance their operational efficiency in order to respond to market changes and satisfy customer demands.
(Any three of the above, 2 marks each)
B1C03T2Q005eng
Government departments and public corporations are often criticised for their low efficiency. Account for their low efficiency in terms of their characteristics. (6 marks)
Answer:
Most public enterprises do not have direct competition, so there is little motivation for them to operate efficiently.
As public enterprises are big, decision-making processes are complicated and slow, thus reducing the efficiency of operations.
Most public enterprises have a bureaucratic structure. This makes communication difficult. Projects are likely to be held up and delayed as a result.
Many people are involved in the decision-making process. It can be difficult for them to reach an agreement. Operational efficiency is low as a result.
(Any three of the above, 2 marks each)
B1C03T2Q006eng
Mr Tang was a financial controller in a public limited company. A year ago, he quit his job and opened an audit firm in Central.
(a)What form of business ownership is Mr Tang involved in? (1 mark)
(b)This year, Mr Tang has invited Mr Hung to join his company. Mr Hung will invest money in the business and own part of the company. Which form of business ownership does Mr Tang’s company belong to? (1 mark)
Answer:
(a)Sole proprietorship(1 mark)
(b)Partnership(1 mark)
B1C03T2Q007eng
Ethan is a designer in a public limited advertising company. For years, she has gained a lot of experience in liaising with clients on concept design and development.Since she is not satisfied with the management of the company, she is thinking of opening a design house of her own. Ethan decides to put down $100,000 as her initial investment. To save on cost, she will not hire any staff and will handle all the work by herself.
(a)If the business fails, how much will Ethan lose? (1 mark)
(b)What problems will Ethan likely face as a sole proprietor?(4 marks)
(c)If Ethan dies, how will the business be affected?(1 mark)
(d)Amy, one of Ethan’s friends, suggests that Ethan can find a partner to share the business risks. Besides sharing business risks, what advantages can Ethan gain by forming a general partnership over a sole proprietorship? (4 marks)
Answer:
(a)As a sole proprietorship is not a legal entity, the owner’s liability is unlimited. Therefore, if the business fails, the amount of loss can be unlimited. (1 mark)
(b)
Ethan has unlimited liability. If the business fails, Ethan may lose not only the business, but also all her possessions.
Ethan has a great responsibility and a heavy workload. She has to work long hours and has little time to rest.
Ethan will probably not have all the skillsneeded to develop the business well, e.g., marketing , accounting and management. It will be difficult for her to run the business.
If Ethan falls sick or even dies, there will be no one to succeed her in her business. The business may have to close down.
The source of capital is quite limited for Ethan’s business. Its sources mainly come from Ethan’s savings, retained profits or loans from Ethan’s friends and relatives. Because of the firm’s low creditworthiness, Ethan may have difficulty in obtaining loans from banks or making purchases on credit.
With limited resources, Ethan has to face keen competition from large businesses.
Ethan may have a heavy burden of some unavoidable costswhich account for a large proportion of her total costs.
(Any four of the above, 1 mark each)
(c)As a sole proprietorship lacks continuity, the business has to close down. (1 mark)
(d)
Division of labour:Each partner can contribute his expertise and ability to the business, e.g., the new partner can help Ethan in marketing, accounting and management.
More sources of capital:The new partner can bring in more capital,which leads to further and better business development.
Better chance of promotion: The scale of a partnership is usually small. It is easier to attract employees as they may have a better chance of promotion. Sometimes, capable employees may become partners.
(Any two of the above, 2 marks each)
B1C03T2Q008eng
The following is information about Firm X, a gift premium manufacturer in Hong Kong.
Legal entity / YesNumber of shareholders / 40
Source of capital / Raised by issuing shares
Financial information / Disclosure to public not required
Due to the declining performance of the company in recent years, the CEO of the company decides to resign on his own will. His resignation is quickly approved by the board of directors. The board of directors is now considering converting the company into a public limited company.
(a)Which form of business ownership does Firm Xbelong to? (1 mark)
(b)How will the continuity of Firm X be affected by the replacement of the CEO?(1 mark)
(c)How does a public limited company differ from the company’s existing form of business ownership? Compare their differences in terms of:
(i)Number of shareholders
(ii)Raising capital
(iii)Disclosure of financial information
(iv)Transfer of shares(8 marks)
(d)What advantages can Firm X gain from becoming a public limited company?(4 marks)
(e)How can Firm X issue shares to the general public in Hong Kong?(2 marks)
Answer:
(a)Firm X is a private limited company. (1 mark)
(b)As limited companies have a separate legal entity, the continuity of Firm X will not be affected.(1 mark)
(c)
Private limited company / Public limited company(i)Number of shareholders / 1-50
(1 mark) / At least one, no upper limit
(1 mark)
(ii) Raising capital / Invite new shareholders to join or raise capital from existing shareholders
(1 mark) / More sources of capital: raise capital from existing shareholders; issue new shares to the public
(1 mark)
(iii)Disclosure of financial information / No need to disclose financial information to the general public
(1 mark) / Need to disclose financial information to the general public
(1 mark)
(iv)Transfer of shares / The board of directors may have the power to refuse to register share transfers.
Shares cannot be sold on the stock market.
(1 mark) / Shares can be transferred freely.
Shares can be sold freely on the stock market if the company is listed on a stock market.
(1 mark)
(d)
It is easier to obtain loans from banks and make purchases on credit because of its higher creditworthiness.
More capital can be raised through issuing shares on the stock market
The separation of ownership and management enables the company to get specialists to take up different roles. This improves the management and efficiency of the company.
(Any two of the above, 2 marks each)
(e)Firm X can issue shares to the general public by listing on the stock market, i.e., the Main Board and the Growth Enterprise Market(GEM). (2 marks)
B1C03T2Q009eng
Dave and Marco plan to open a supermarket in the form of a general partnership. Each will invest $200,000. Dave will be responsible for merchandising and marketing in the supermarket while Marco will be engaged in management and accounting duties. Today, Dave sees an advertisement in a newspaper.
GREAT WAY TO START YOUR BUSINESS
With 50 years in business, KK SUPERMARKETINTERNATIONAL’s tremendous strength lies in its good reputation. We are famous for our quality goods and services.
KK SUPERMARKET INTERNATIONAL now invites franchisees.
Join us and you can gain the following advantages:
-Low investment costs
-No experiencerequired
-Fast set-up procedures
-Full support
------
Set up your business with ease.
For details, please call 23122008.
As Dave and Marco do not have any experience in the industry, Dave suggests that they should start their business as a franchisee.
(a)Assume Dave and Marco open a supermarket as a partnership. If the business fails, how much money will Dave and Marco lose? (1 mark)
(b)Refer to (a). If Dave wants to leave the partnership after opening the supermarket, how will the continuity of the supermarket be affected? (1 mark)
(c)Refer to (b). What kind of legal agreement should Dave and Marco make before opening the supermarket as a general partnership? How can this protect the partners’interest? (3 marks)
(d)When compared with setting up a supermarket as a general partnership, how can Dave and Marco benefit from becoming a franchisee of KK Supermarket International? Explain three ways. (6 marks)
(e)List four criteria in determining whether they should start their business as a franchisee. (4 marks)
Answer:
(a)As a general partnership is not a legal entity, partnershave unlimited liability. If the business fails, their losses can be unlimited. (1 mark)
(b)As a general partnership is not a legal entity, the supermarket has to close down.
(1 mark)
(c)
Before setting up a general partnership, they should sign a Partnership Deed.(1 mark)
A partnership Deed can avoid disputes in the future. It defines the rights and responsibilities of the partners with details on:
(i)the name of the firm and the nature of the business;
(ii)how much capital is contributed by each partner;
(iii)how profits and losses are to be shared; and
(iv)the salaries earned by each partner.(2 marks)
(d)
They can obtain support from the franchisor in terms of marketing, inventory supplies, accounting and management. As a supermarket needs to have a wide variety of goods,KK Supermarket International’s years of experience in the industry can help Dave and Marco in sourcing.
KK Supermarket International has built up goodwill. Their products are well-known and accepted by customers.
As KK Supermarket International provides a wide range of support, they will find it easy and quick to set up their supermarket.
Since a supermarket sells a wide variety of goods, with limited resources as a general partnership, the purchasing prices of goods can be very high due to the small quantities they buy. If they join KK Supermarket International, they can enjoy the benefits of a large shop such as lower costs when buying stocks in bulk. This greatly reduces the cost of goods. KK Supermarket International may also have greater bargaining power to fight for a better purchasing price.
The management system of KK Supermarket International helps establish goodwill quickly.
(Any three of the above, 2 marks each)
(e)
Can they afford the franchise fee, promotional and management fees?
Do they need support from the franchisor? Do they have experience in running a supermarket? Do they have knowledge of the industry?
Can KK Supermarket International’sreputation attract a lot of customers?
Do they want autonomy in their business operation?
Can they communicate and receive support within a short time? Is the franchisor’s office located overseas? Will the geographical differenceaffect their business?
(Any four of the above, 1 mark each)
B1C03T2Q010eng
Mr Chan used his savings to start a small business as a chinaware manufacturer many years ago. For years, Mr Chan’s chinaware has been well-regarded for its traditional hand-made quality. His products are mainly exported to the US and Europe.
Mrs Chan helps Mr Chan in the daily running of the company. They have a son, Patrick, who is now studying fine artsabroad. Mr Chan is considering passing the business to Patrick but Patrick seems to have no interest in taking over the family business. He wants to pursue a teaching career in a university.
(a)Which form of business ownership does Mr Chan’s company belong to? (1 mark)
(b)If Patrick does not carry on the business, how will the company be affected after the death of Mr Chan? (1 mark)
(c)Mr Chan is thinking of converting the company into a private limited company. How can his company benefit from such a decision? (6 marks)
(d)Suggest two reasons why Mr Chan would not prefer changing his company into a public limited company.(4 marks)
Answer:
(a)Sole proprietorship(1 mark)
(b)The business will have to close down.(1 mark)
(c)
A private limited company has limited liability. Mr Chan can thus avoidthe loss of personal assets if the business fails.
A private limited company is a separate legal entity and is therefore independent of its owners. The company can have continuity and its future is no longer threatened by the illness or death of the owner.
As a private limited company can raise capital by issuing shares, it has more sources of capital. In general, it is easier for a private limited company to raise capital compared withthat of a sole proprietorship. More capital can lead to further and better business development.
With more sources of capital, the size of the business of a private limited company is usually larger. The company can thus operate on a larger scale.
(Any three of the above, 2 marks each)
(d)
A public limited company needs to disclose much more information, e.g., financial information.
If most of the company’s shares fall into the hands of other parties, the existing shareholders may lose control over the company.
If the company goes public, the price of its shares will be affected by many other factors in the stock market.
(Any two of the above, 2 marks each)