Types of business ownership, sources of finance and a case study of Tescos
Introduction
The Business I have chosen to base my work on is Tesco. Tesco is a very big company with huge revenues. This is also a public limited company that means it has limited liability. The aim of this company is to make profit. I have chosen this company because it is a well-known and established company, which has been trading for many years. The business had a turnover of £28,613m in the year 2003. Its core service is retail. Tesco is a leading retailer, operating 2,291 stores around the world and employing 296,000 people. It used to be purely a UK operation but has expanded to many other parts of the world such as Europe and even as far a field as Asia. There are four strands to Tesco's strategy: core UK business, non-food, retailing services (personal finance and online grocery sales) and international.
Tesco also has commitments as a company such as protecting the environment. Most of its products at the present time are not tested on animals for or by Tesco as is written on the product. Tesco also likes to help deprived communities. For example they have 6 regeneration partnerships opened to help communities that are deprived of social and economic wellbeing. In the UK alone they have 1,982 stores. The stores they open are all tailored to meet the customer's needs. For example, they have four types of stores; Extra, Superstore, Metro and Express. All 4 offer different shopping experiences but all have the same outstanding value. As a result of listening to their customer's feedback, they have improved 200 of their stores over the UK. 104,000 of their staff are shareholders in the business.
Tesco's Clubcard is the UK's most popular loyalty scheme. Two hundred million AIR MILES have been issued to customers this year. Clubcard holders can collect points at over 3,000 UK outlets including Allders and Marriott hotels. Tesco also has its own brand. Items of its own brand are usually much cheaper than other brands. This benefits customers who are not well-off economically but still require the same quality standards as others.
History Of Tesco
Tesco believes in building a world class business by working harder to deliver great value for customers, in every store, in every country, everyday. The businesses in Europe continue to prosper and achieve better results and gain momentum, supported by learning from the UK. Tesco are now the leading hypermarket retailer in four of the five European markets, serving three million customers a week and employing 41,000 people. All four parts of the Tesco strategy, the core UK business, non food, retailing services and International are growing. Tesco plc. are now market leader in 5 of the 9 markets that they now operate in.
Tesco was founded in 1924 by Sir Jack Cohen. He used his gratuity from his Army service in the First World War to start selling groceries in London's East End markets in 1919. The brand name of Tesco first appeared on packets of tea in the 1920s. The name was based on the initials of T.E. Stockwell, a partner in the firm of tea suppliers, and the first two letters of Cohen. The first store to be opened was in 1929 in Burnt Oak, Edgware. Over the last seventy eight years, as the retailing market has changed, the company has grown and developed, responding to new opportunities and pioneering many innovations. Today it is Britain's leading food retailer.
In the 1930's self service supermarkets opened in the USA, during the depression. Companies soon realised that by selling a wider variety and having a larger volume of stock, and employing fewer staff, companies could offer lower prices to the public. During the 1930's depression, the Tesco business prospered and grew in the years between the war.
In 1947 Tesco Stores Ltd was floated on the Stock Exchange, with a share price of 25p. The price at the beginning of February 2002 was approximately 2.42p.
After the Second World War, Self-service stores arrived in Britain, and Jack Cohen opened the first Tesco Self-service store in St Albans in 1948.
In 1956 the first Tesco self-service supermarket was opened in a cinema that was converted in Maldon.
By 1970, Tesco had become well known and a household name. Its reputation had been built on providing basic groceries at very competitive prices; the slogan "Pile it high and sell it cheap" was the title of Sir Jack Cohen's autobiography. But as people's wealth increased they required more luxury items as well as everyday household products and food products. In the late 1970s the company decided to broaden its customer base and make its stores more attractive to a wider range of customers. Most of the old and highstreet stores closed and the company concentrated on creating bigger out of town stores. As the stores were bigger, they sold more items, had wider isles and had better lighting; all this while still offering competitive prices on all of its products. The emphasis was also on quality, customer service and a customer friendly environment. In 1947, Tesco opened its first petrol stations at its major sites, selling petrol, also at very competitive prices. Tesco finally stopped giving trading stamps in 1977, at the same time introducing a price cutting campaign under the banner "Checkout at Tesco" which proved to be a major success.
Private Limited Companies
Most PLC's commence as sole traders or partnerships. They are mostly small-scale operations, often with just family members running the business. One would establish a limited company to:
> Improve their financial security, as the owners (now called shareholders) are no longer personally liable for their debts. Instead their liability is limited to the amount of their investment. The abbreviation 'Ltd' has to be part of the name of the business. If the business fails, the owners do not go bankrupt. Instead the company goes into liquidation. So another business that lends or sells items on credit should check that the business is financially secure before trading or providing a service to them.
> Display a good image of themselves to their customers, who are likely to believe that the business is more secure whether it maybe or not.
A private limited company distributes shares to its owners. Each share represents a share of the company and each share equals one vote. If a shareholder had more than half of the company's shares they could always the rest of the shareholders. This is why the amount of shares distributed and held always has to be thought out carefully. Otherwise the business may lose many shareholders and therefore more if ...
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> Display a good image of themselves to their customers, who are likely to believe that the business is more secure whether it maybe or not.
A private limited company distributes shares to its owners. Each share represents a share of the company and each share equals one vote. If a shareholder had more than half of the company's shares they could always the rest of the shareholders. This is why the amount of shares distributed and held always has to be thought out carefully. Otherwise the business may lose many shareholders and therefore more if its value.
Advantages
* The business can still remain minute; numerous private limited companies have only three or four shareholders.
* The accounts are still private between the owners, their accountants and the Inland Revenue.
* The shareholders are often directors - and responsible for running the business.
* The owners can never lose more than they have invested, no matter how much money is owed because they have limited liability.
* Shares can only be transferred with the agreement of all shareholders, and cannot be sold to the public. This gives the owners direct control over the business.
* Banks are more willing to make loans to a limited company - particularly is it has a good financial track record in business.
* The owners can never lose more than they have invested, no matter how much money is owed because they have limited liability.
* The owners, or shareholders, usually work in the business every day and have a vested interest in its success.
* It is relatively easy to set up a private company - in some the owners may only invest £100 to £200 each to start with.
Disadvantages
* The business cannot sell shares to members of the public to accumulate additional capital
* Limited companies have more regulations than sole traders or partnerships to abide by, for instance they have to register with the Registrar of Companies and have their accounts audited by an accountant. They also have to comply with the requirements of various companies Acts.
* This type of company cannot trade under the name of an existing company such as Asda as this may lead to confusion to both customers and suppliers.
* If the company stops trading it must be officially 'wound up' and if cannot pay its debts it will go into liquidation, which can be time consuming and a difficult process.
Public limited companies
Private limited companies are the largest type of privately owned enterprise in the UK. Many started as private limited companies and were then launched on the stock exchange. Any person can buy shares in a public limited company - identified by the letters 'plc' after its name. The shareholders in these companies are different from the directors - who are usually free to choose whether or not to own shares. Many directors are simply salaried employees, paid to run the company.
A company must have more than £50,000 before it can 'go public' and must have a satisfactory financial track record. Also, their needs to be enough people interested in buying shares for it to have a successful flotation.
Advantages
> The major benefit is vastly increased capital as many thousands of people or organisations may buy shares in the company. This makes expansion much easier.
> Some public companies can be quite small - there only needs to be a minimum of two directors and two shareholders.
> Very large public companies can often operate more cheaply than small companies as they operate on economies of scale. For instance, they can mass-produce goods for scale and buy in bulk to save money.
> If the company is successful, the shares will increase in value, which will increase the overall value of the company.
Disadvantages
> A public company must be registered as such with the Registrar of Companies and has many external regulations to comply with. Any problems a company encounters may become news if the press run a story on it.
> Specific accounts must be prepared each year and these must be audited. The accounts must also be published so that a 'problem year' cannot be hidden.
> Shareholders will expect to receive a dividend in return for their investment. They will also want their shares to increase in value. If the company has a poor year or if the stock market performs poorly and the shares fall in value, shareholders will be tempted to sell, further lowering the price. This makes the company vulnerable to a take-over bid, as it is then relatively 'cheap' to buy.
> The shareholders may have little interest in the long-term prospects of the company and simply be interested in quick returns on their investment.
> The original owners may lose most of their control over the company, even if they retain a substantial number of shares.
Sole Traders
In this type of business there is only one owner and he/she can employ whom ever she wants to work in the business. This type of business is normally started up by someone's personal savings and help from a bank or another person towards the start-up of the business. Therefore the person who owns the business has unlimited liability which means that the owner may also lose his personal belongings and may be made bankrupt. If the firm is successful then the owner's reward is the profit. The owner can keep all the profit after expenses have been paid (net profit), although they must pay income tax on this to the Inland Revenue.
If the business is not successful the owner is the one who pays for all the losses. The sole trader can make all the decisions when running the business and is responsible for keeping accounts to show how much profit has been made each year.
Advantages
* Easy to set up - there are no formal procedures to follow, particularly if the sole trader is using their own name.
* Suitable for offering a personal service to customers.
* Applying the decisions made are quicker; no-one else to consult with
* The sole trader is their own boss.
* The sole trader can choose opening times of the business and when he/she wants to work.
* Unpaid debts can be avoided, as the owner usually knows the customers - and most transactions are usually for cash, rather than on credit.
* There is minimum paperwork - unless the business is registered for VAT.
Disadvantages
* Lengthy working hours
* Difficult to raise capital to start up or expand the business.
* Illness and sickness cause problems - When the business is closed the owner makes no money.
* Highly dependent upon the skills and ability of one person.
* The owner's skills may only relate to his or her specialist area and be poor in relation to running the business and undertaking accounting, marketing and administration activities.
* Unlimited liability
Other Facts
* In law, the sole trader and the business are one and the same. If a local hairdresser ruined you, you would sue the owner, which may be the hairdresser himself or herself. When the owner dies the business ceases to exist.
* The capital to start the business is normally the owners own savings or borrowed from a family or a friend. Banks are often reluctant to lend money to sole traders.
* A sole trader can keep all the profit after expenses and income taxes are paid. The accounts of the business are private.
* Opportunities for development are likely to be limited because it is difficult to raise additional capital. The most usual way to expand is to plough the profits back into the business to extend the premises or open more outlets. However, this will depend on the ambition of the owner- many sole traders prefer to operate on a small scale.
Partnerships
A business partnership is set up by at least two people and up to twenty. The partners jointly own the business which responsibilities and risks are shared by the partners. People with different skills often form partnerships, so a greater range of services can be offered. In most partnerships, all the partners play an active part in the business. In some partnerships there may be one or more sleeping partners who have invested money but do not work in the business on a day-to-day basis. They usually receive a smaller share of profit than active partners.
It is sensible for the partners to sign a Deed of Partnership which sets out the details of the partnership agreement, such as the salary of each partner, the share of the profits each one receives and the procedure to follow if there is a dispute. Whilst this is not a legal requirement, it does save disputes later. All partnerships are governed by the Partnership Act 1890, which assumes that all partners are equally liable for any debts, unless a Deed of Partnership with different terms has been drawn up.
Advantages
> Problems can be shared and discussed.
> New skills and ideas can be introduced.
> It is usually easier to raise capital as all the partners contribute.
> There are obvious benefits to be gained from combining the knowledge and expertise of all partners.
> The partners can specialise in their own particular area of expertise.
Disadvantages
> The partners may not always agree or contribute equally.
> The profits must be shared.
> All partners must be consulted before a major decision can be made.
> The partners have unlimited liability for any debts, and are therefore personally liable.
> The actions of one partner are binding on all the other partners.
> The death of a partner means the withdrawal of this share of the capital as the money must be paid into his/her estate. For this reason, it is usual to take out a life assurance policy on each partner's life.
Additional Facts
> In law, the partners are 'jointly and severally' liable for the actions of each other. This means, for instance, that if one partner ran up debts and then disappeared, the others would be responsible.
> Partners share the profits equally, unless a different arrangement is specified in the Deed of Partnership. They are all liable to pay income tax on the profits.
> All the partners have unlimited liability for all debts but the accounts are still private. In a limited partnership, which is rare in the UK, the sleeping partners may only be liable for the amount they have invested in the business. In such cases at least one active partner must have unlimited liability for all the debts.
> Financing the business is easier because all the partners contribute towards the enterprise. Raising money for expansion is also easier. However, most partnerships are relatively small scale, though there are exceptions.
Co-operative
A co-operative is a corporation organized and controlled by its members, who put in resources to provide themselves and the others within the business with goods, services, or other benefits.
The co-operative's start-up capital usually comes from co-op shares purchased by members.
Each member's liability is limited to the amount of his or her share in the capital.
Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility, and caring for others.
Co-operatives are voluntary organisations; open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political, or religious discrimination.
Advantages
* owned and controlled by members
* democratic control (i.e. one member, one vote)
* limited liability
* Profit distribution (surplus earnings) to members in proportion to use of service surplus may be allocated in shares or cash.
Disadvantages
* Possibility of conflicts between members
* Takes longer to process decisions
* It requires participation of all members for success
* It requires extensive record keeping
* less incentive to invest additional capital
Franchises
A franchise occurs when a business, the franchisor, licenses its trade name, brand and business methods to an individual, the franchisee. This is a basic system for starting a franchise. When you're starting a franchise you agree to operate the business in accordance with the Franchise Agreement with the franchisor's support. In return the franchisee pays a fee as well as on-going royalties. If you're starting a franchise, it's important to know that there are two different types of franchise. When you're starting a franchise any franchisor must give its new franchisees the systems and training that they need to operate their own business without having to work it out for themselves. The franchisor will have already made all the business mistakes. The franchisees are paying for the franchisor's experience to gain a short cut during start up. The franchisee is essentially buying the experience of the franchisor, its brand or logo, business methods and both initial and on-going training and support. This is the only way of starting a franchise.
Advantages
* Well-known trademark, either regionally or nationally, and its growing goodwill - saving the business owner the cost of creating and advertising a name that customers already recognize.
* Established business framework - this way there is minimal work in starting up a business. Framework of the business is already made.
* Well-tested sources of supply and service - saving time and trouble in finding suppliers of needed products and equipment.
* Ongoing sales and marketing assistance - franchisors have proven, existing, and successful systems of advertising and marketing.
* Reduction of risk - you are buying into an established business so the risk of failure is lower.
Disadvantages
* Loss of control and freedom - since the franchisor's standards have to be followed, a franchisee may have limited opportunities to use his/her own initiative
* Continuous royalties could be as high as 10% of revenues - this amount could determine whether you business is profitable or not.
* Advertising fees - there is usually a fee for advertising on a regional or national basis. If the franchisor does not make the best use of your advertising money, this could be a waste of money.
* The franchisor's problems are also your problems - for example, you could have a serious issue if there was a conflict between the franchisor and a major supplier.
Charities
Charities are often run by full-time professionals and supported by a network of volunteers, which maybe all over the world, an example of a worldwide charity is UNICEF. There are more than 6,000 registered charities and voluntary organisations in the UK alone; another example of a UK charity is the NSPCC, which helps protect children in the UK against cruelty. Such are organisations are financed by collections, flag days, donations, bequests and trading activities. Some organisations like the RSPCA even sell goods in stores such as Tesco to raise additional funds. Company sponsorship is also important, providing support such as free-rent accommodation, a minibus or the loan of a manager. The National Lottery also makes awards to charities to help boost them.
In addition to charities, charitable trusts operate in both the private and public health and education sectors. These organisations operate as businesses but benefit from some tax advantages
Mutual Organisations
Some building societies and mutual life assurance businesses are non-profit making. Examples include the Portman Building Society and Standard Life Assurance Society. These types of businesses have no shareholders and no owners. They operate wholly in the interest of their customers (their members). Any surpluses they make are ploughed back into their business or paid to the organisations members
Liabilities Of Tesco
Tesco is a limited liability company. Which means that no-one in the company has full responsibility if the company fails. No-one in the company loses personal belongings if the company is unsuccessful. The advantages of having a limited liability company are as follows;
* Limited personal liability. The members of the company are only liable for the company's debts up to the value of their shareholding or guarantee.
As Tesco is a public limited company it has to have at least 2 directors and at least 2 shareholders. These people in the business are very important to the business. Without them Tesco would not function properly as a business and could not be called a public limited company. If the business is unsuccessful the shareholder can only lose what he invested in the business. This is an advantage of being a shareholder. Same is for other people who have invested in the business. If Tesco were to be a sole trader company then one person would have to deal with all the problems and could even lose their personal belongings if the business fails to make profit.
If you have a Limited company you are limiting your personal liabilities. A Limited Company is a legal entity in its own right. You are not personally liable for the company's debts, as long as you have traded legally or you have not given personal guarantees regarding contracts or suppliers etc. If things go wrong the creditors are paid out of the company's assets not from your own personal assets. Also once you have chosen and registered your company name no other company can use the same name, unlike business where names can be duplicated.
Sources Of Finance
There are a number of ways in which Tesco can raise the finance necessary to purchase assets and fund working capital.
As Tesco is a Public Limited Company it has 3 main sources of finance.
* Selling shares freely on the stock market
This way many people can buy shares from the business whom ever they are as long as they have the money. As Tesco has many shareholders it is most likely that the company will not have seen face to face each individual that has bought shares in the company. This can be risky at times since you do not know who is buying shares in the company.
* Raising loans- Public limited companies are able to use a variety of financial institutions
There are a number of ways in which Tesco can raise the finance necessary to purchase assets and fund working capital. But they depend on various factors, which include;
* The amount of money required by the business
* The risk that the business represents to the potential lenders
* The time period over which the loan is required
As Tesco is a very big company and makes enormous profits a bank would not be too hesitant on lending them money, as they know that the company will be most probably able to pay back the loan on time and in the full amount.
Control Of The Business
The people that control the business depend on what type of business it is. For example the person controlling a small sole trader business would be the person that started the business and owns it. But since Tesco is a very large organisation it would have many people controlling the business and the decisions made. In companies control is more complex. Significant power and influence resides with the directors. There are two types of directors;
* Executive directors are usually employees of the company, holding a senior managerial position. These people are elected to the board of directors by the shareholders to represent their views in the decision making process.
* Non-Executive directors are not employed by the company and are usually only part-time appointments. Non executive directors often include people like politicians, scientists and senior managers from other organisations.
Tesco would have a board of directors. Since this business has many shareholders these would be the people that appoint and elect the directors to air their views on the business and the way it is run. All shareholders have a say in the business as they have invested in the business and are a major financial investors which every PLC company needs. Without shareholders a business may not be able to raise enough capital to start or run the business in a successful manner.
Use Of Profit In Tesco
In some business profit gained would be either ploughed back into the business or kept to improve a person's financial situation. This is mostly sole-traders because only one person would own the business, be it small or large, and they would make all the decisions regarding the use of profit in the business.
But companies like Tesco run their business in a very different way relating to their profits and use of their profits. Most companies have to publish their profits and what they used these profits for in an annual report so that shareholders know what is going on with the money they invested and how usefully the money is being used by the business. Companies like Tesco can choose whether to pay profits to shareholders in the form of dividends or they alternatively may hold the profits within the company for reinvestment.
Companies like Tesco usually combine these options, distributing a proportion of profits to shareholders and retaining the rest to invest within the company.
Some forms of business such as co-operatives and friendly societies distribute profits to their members. Often the share of profits members receive is proportional to the amount they have spent or invested within the society.
Legal Liabilities
Liabilities are anything that the business owes such as debts to suppliers, loans, mortgages.
There are different liabilities for different types of organisations. For example, a sole trader would most probably have unlimited liability as there is only one owner of the business and that owner must take great care to make sure that the business does not go into deficit for large periods of time. If this happened then the owner would have to pay the debts with his own personal savings, he/she may even have to sell his personal belongings such as his/her car or even their house if the debt is extremely big. This is the risk you can run into when you run a sole trader business.
Since Tesco is not a sole trader type of business it does not have one owner and no-one can lose personal belongings if the business goes into deficit and debt needs to be paid. As there are many shareholders in this business the shareholders can only lose what they invested in the business. This may be a lot of money if a shareholder has a big share in the business. There is much less risk to people investing in a limited liability company. They do not lose their personal belongings which makes shareholding a popular investment.
Mohsin Sharif AVCE Business Studies
2FC Mr Adeyogun