Number 2 & 3 – important advantages – reason why sole traders are so popular
Disadvantages of Sole Trader:
- The sole trader has unlimited liability
He can lose everything he has to pay for any debts
- The sole trader has full responsibility of the business
Take all the decisions himself – sometimes not good at everything i.e. needs to work long hours
- Lack of continuity
Business cannot open if the owner is ill or wants to take a holiday
- Lack of capital
Problem of money if the owner wants to expand – banks are reluctant to give loans to sole traders since they often do not repay the loan – end up to remain a small business
Partnerships
- If sole trader 1. needs more money 2. needs someone to help him run the business, partnerships can be formed with little formality
- Common amongst lawyers, doctors, accountants etc.
- Two to twenty partners
Advantages of Partnerships:
- Partners can bring more ideas to a business
- More partners means more money for the business
If people want to share in the ownership, they must pay money: used to expand the business
- Partners can help in decision making
Decisions are shared
Disadvantages of Partnerships:
- Partners can disagree
More partners, more disagreement – business will suffer
- Partners have unlimited liability
- Partners can lose everything they have if the business goes bankrupt
- Each partner held responsible for the actions of other partners
- Some partners have limited liability – limited/sleeping partners – they do not take part in the day-to-day running of the business
- At least one partner have unlimited liability
- Partnership lack capital
More capital than sole trader; still there’s a limit of money because of limit of 20 partners
No partnership in the world is a very large business because of capital. Other type of business is necessary to expand more.
Limited Liability Companies
- Joint Stock Companies
- Two types:
- Private Limited Companies (Ltd) – Malta - more common than plc’s
Examples: Fino & Sons Ltd, Agius & Agius Ltd
- Public Limited Companies (plc) – larger than Ltd’s
Examples: Farsons plc, Bank of Valletta plc
The Capital of Companies:
-
Capital divided into shares – bought by people to:
- Invest in the company
- Become an owner of the business
-
Person who buys a share in the business - shareholder – one of the various owners of the company
-
Dividend – shareholders receive profits for each share they hold in the company
How are profits divided between shareholders:
- Profits divided between all the shareholders according number of shares they each hold
- Example: Mozen plc: shares at €1 each
Ivan has 400 shares i.e. value of capital invested: €400
Private Limited Companies
- Shares - sold privately to family, friends & workers in the company
- Given a certificate - states how many shares they hold & their value
- All shareholders – limited liability
- Large number of shareholders i.e. cannot work all in the business & manage it from day-to-day:
- Disagreement
- No experience needed to run the company
- Shareholders choose a board of directors from amongst the shareholders themselves to run the company on a daily basis
- Election done at the Annual General Meeting (AGM) - once a year
- Each shareholder has one vote for each share that he holds - the more shares he holds, the more votes he has
- Example: Jason has 2500 shares i.e. he has 2500 votes
- Original owners who formed the company wish to keep more shares than anyone else i.e. most votes. Advantages: greatest power to -
- Vote for themselves as directors
or
- Vote the directors they want
- End of the financial year publish annual accounts – sent to all the shareholders
- Accounts are private – no one can see them apart the shareholders
Advantages of a Private Limited Company:
- Shareholders have limited liability
- Shareholder only responsible of any debts up to the amount of money they originally put into the company
- Without limited liability, people unwilling to buy shares - not risk their personal possessions
- Shareholders have no management worries
Shareholders – no responsibilities & worries - pass this responsibility & elect directors to manage the business – done at the AGM
- The company has a separate legal identity
Company & its owners – separate persons i.e. if the company owes money, the name of the company can be sued & not the owners; company forced to pay its debts, but not the owners
Disadvantages of a Private Limited Company:
- The printing of the annual accounts can be very expensive
Writing, printing & postage of the annual accounts to all shareholders - expensive
- Private Limited Companies must hold an AGM of shareholders each year
- AGM’s are expensive to set up
- Original owners of the company lose control
- The original owners of the company may lose control
- Company profits are taxed twice by the government
- Company makes profit – some given as tax
- After-tax profits to pay dividends
- Shareholders receive money – pay some of it as tax
- Private Limited Companies cannot sell shares on the Stock Exchange Market
Private Limited Companies sell their shares privately
Sell many more shares & raise far more money on the Stock Exchange i.e. restricted to be small to medium sized companies
Public Limited Companies
- Largest & some of the most successful firms in Malta & in the world
- Examples: HSBC plc, Middle Sea Insurance plc, Gasan & Mamo plc etc.
- Minimum two shareholders
- Main Advantage: offer their shares for sale on the Stock Exchange, Valletta – can be sold to any member of the general public incl. worldwide market i.e. attract money from investors all over the world
Advantages of Public Limited Companies:
Plc’s have the advantages of Private Limited Companies, but two important additional advantages:
- Public Limited Companies can sell shares on the Stock Exchange
Able to sell its shares in the Stock Exchange i.e. raise far more finance than Private Limited Companies
- Public Limited Companies can advertise their shares
Plc’s attract shareholders by placing advertisements - raise more money
Disadvantages of Public Limited Companies:
Plc’s share some of the disadvantages of Ltd’s & additional disadvantages
- It is expensive to form a Public Limited Company
Legal documents, advertisements & a document giving information for prospective buyers of shares
- The original owners of the company may lose control
Very possible in a plc because so many shares are sold to other people
- There may be a lot of shareholders who do not vote
A lot of shareholders having a small number of shares i.e. they feel it is not worth attending AGM’s – few who have large number of shares control the company
- Public Limited Companies are difficult to manage
Large company i.e. difficult to manage; more people to consult in decision-making – very slow decision-making, disagreements
Franchise
-
Franchising: individual (franchisee)/group - permission by a company to:
- Use its own name
- Produce same products or services
- KFC
- McDonald’s
- The Body Shop
- Pizza Hut
-
Franchisee gives to the franchisor:
- Amount of money – right to use same:
- Franchisor gives to the franchisee:
- Advertisements
- Free gifts etc.
Advantages of being a franchisee:
- Great chance of success – product well-known in the market
- Brand name advertised throughout the nation & the world
Disadvantages of being a franchisee:
- Not independent – franchisor follows him
- Give some of the profits to the franchisor
Co-operative Enterprise
-
Controlled by workers or by consumers
- Aim: provide benefits for its owners
- Example: employment for workers, lower prices for consumers
- Each of the owners/members – equal share in the control of the firm i.e. one person, one vote regardless how much money they put into the business
Worker Co-operatives
- Organisations owned by workers eg) mini-buses co-operative in Malta
- Raise money to buy equipment – share equally in decision-making & any profits
- Example in the 1970s: many firms were closing down & making their workers unemployed – worker co-operatives took over small manufacturing businesses that were closing
- Few worker co-operatives in Malta compared to countries like France, Spain etc.
Advantages of worker co-operatives:
- Likely to work harder – can take part in making decisions
Popular with workers because:
- Workers are in charge
- Equal say
- Workers receive the profits – paid out as dividends – each worker equal share or according to how much they put into the enterprise
Disadvantages of worker co-operatives:
- Difficult to raise money – rely on borrowing from banks, workers & local councils i.e. cannot expand easily
- Badly run – workers have little business experience & entrepreneurial ability
Consumer Co-operatives
- Retailing businesses - run for the benefit of their consumers
- First retail co-operative society - formed in 1844 – group of workers: low pay & high food prices – joined together to buy food direct from wholesalers
- Buy food in bulk i.e. suppliers often give them discounts
Today:
- Any profits made given back to consumers as i) dividends ii) low prices
- Principles of modern co-operatives:
- Owned by their members
- Any person can become a member by buying a share
- Members elect a board of directors
- Each member – one vote regardless the number of shares
- Profits shared between members
- Smaller co-operative shops closed – competition large supermarkets
- Compete: opened large superstores selling variety of G & S
Note:
Limited liability: consumer & worker co-operatives
Public Corporations
- Operated by the govt on behalf of the public
-
Chairman: manages the business; chosen by the govt
- Employees – employed with the govt
- Offer essential G & S, examples:
- Water
- Electricity
- Public transport etc.
-
Private companies rarely offer them – a lot of initial capital; no profits
- Operated to give a G or S – essential; no view of making a profit
- Examples:
- Enemalta Corporation
- Water Services Corporation
Advantages of Public Corporations:
- Provision of G & S is ensured
- Whole nation benefits from profits
Disadvantages of Public Corporations:
- Managers – politicians – no business expertise
- No profit i.e. workers may not work as hard as they could
Local Authorities
- Uses factors of production - provide S eg) parks, roads, schools etc.
- No profit
- Main aim: give a service
- Controlled by a council – elected councillors – ordinary men & women interested in serving the community
- Most belong to political parties – help them to campaign to be elected to the council
- Get income by charging the community for particular services & mostly from central govt
Government Departments
- Aim: give a service - paid indirectly through taxes
- Owned by the govt
- Examples: Education Department, Health Department
-
Govt appoints a minister – responsible: main decisions of the department
-
Director general – responsible: day-to-day running of the department – number of directors to help him
Multinationals
- Firm that operates in more than one country, although headquarters may be in one country
- Some of the largest firms in the world – often selling billions of euros worth of G & S & employing thousand’s of workers
- Most Japanese or United-States owned
- Multinationals in Malta: Microsoft (computers) Baxter (healthcare) HSBC (banking) Vodafone (mobile phone service provider)
- Govts try to get multinationals to locate a plant in their country because:
- Jobs
- Bring business knowledge, skills & technology
- Pay taxes – increase govt funds
- Bring money into the country by selling goods abroad
Advantages of being a multinational:
- Multinational companies are able to sell far more than any other type of company
Factories produce goods in many different countries i.e. increase the number of consumers of the company’s products
- Multinational companies can avoid transport costs by:
- Sell goods in countries where they have their factories
- Locate its factories near to the raw materials it needs
- Multinationals can take advantage of different wage levels in different countries
Locating in a less developed country - take advantage of cheap labour; some countries women & children very low wages
- Multinationals can achieve great economies of scale
Massive production lines producing millions of goods i.e. lower the average cost of producing each good below the average costs of companies making fewer goods
- Multinationals have less chance of going bankrupt than smaller companies
Produce a wide variety of goods; if demand for one product falls they have other products they can fall back on. Selling to a large number of countries reduces the risk of one country reducing its demand for the products of the company: risk-bearing economies of scale
- Multinationals can carry out a lot of research & developments
Spend large amounts of money on research & development to develop new products & be ahead of competing firms
Disadvantages of being a multinational:
- Multinationals move their factories to wherever it is profitable to produce
Example: higher taxes on profit in Malta than in Korea i.e. close the Maltese factory & open in Korea i.e. workers - little control over their jobs.
Govts want multinationals in their country when experiencing high unemployment – lower taxes on profits etc. - encourage multinationals to stay.
Govts compete with each other – allows such companies to force competing countries to give them more favourable treatment
- Multinationals may switch their profits between countries
Transfer profits - countries with high taxes to those with low taxes
Avoid paying any taxes to their host nation – happens in less developed countries – lack the ability to collect taxes – poor tax service & legal framework
- They may force competing firms out of business
Unemployment rises: size & wealth allow them to force smaller firms to go bankrupt & shut down
- Some multinationals may exploit workers
Locate in countries where labour is cheap – pay workers far less than a worker in a developed country i.e. wage costs low
- Some multinationals may interfere in the government of the country
Use subversive & illegal activities – influence the govt to promote & protect their own interests
