1. Chapter 3 Forms of Business Ownership

2. Forms of Business Ownership AAn enterprise is an organisation that produces and/or provides goods and/or services. PPrivate enterprises Owned by private individuals Mostly locally-owned businesses PPublic enterprises Owned by the government Provide the public with essential goods and services

3. Business enterprises Private enterprises Public enterprises Sole proprietorships Partnerships Limited Companies (Private/Public) Joint ventures Franchises Government departments Public corporations

4. Sole Proprietorship AA sole proprietorship is a business owned by one person. IIt is the simplest and the most common form of business organisation in Hong Kong.

5. Sole Proprietorship  Owned by one person The owner alone puts money into the business and has ________ responsibility for running the business. Any profit or loss that results is the _______.  Unlimited liability A sole proprietor has ________ liability. Characteristics of a sole proprietorship Unlimited liability means if the business fails, the owner has the responsibility to pay off all the debts. He may even have to sell his personal belongings. complete owner’s unlimited

6. Sole Proprietorship  Small scale of business The scale of business is small since it is difficult to raise _______ for a sole proprietor. To save expenses, a sole proprietor does not usually have many __________ and he often works in the business. capital employees Characteristics of a sole proprietorship

7. Sole Proprietorship  Managed by the owner The owner may be assisted by family members. Besides __________ the workers, the owner has to perform tasks such as planning, selling products and accounting. The owner makes all the _________ in the business and works ______ hours. decisions long supervising Characteristics of a sole proprietorship

8. Sole Proprietorship  Simple setup procedures The owner can start the business after getting a _________ Registration Certificate.  Low setup costs Little money is needed for setting up a business. Advantages of a sole proprietorship Business

9. Sole Proprietorship  Efficient and flexible operations As the sole proprietor keeps all profits and bears all loses, there is a greater ________ to work hard. Since the owner can make decisions quickly according to changes in market _______, operation is more efficient and flexible. incentive demand Advantages of a sole proprietorship

10. Sole Proprietorship  Close relationship with customers The owner is able to give customers _________ attention. When a close relationship is built up, customers will likely return for more _________ in the future. personal purchases Advantages of a sole proprietorship

11. Sole Proprietorship  Close relationship with employees As there are usually few employees, a sole proprietor can have a ______ relationship with his staff. In a good working environment, the ________ of employees is higher. Advantages of a sole proprietorship close efficiency

12. Sole Proprietorship  Lower profits tax rate The profits tax rate for a sole proprietorship was only _____, compared with 16.5% for a limited company (for the year 2008 – 09)  Easy transfer of ownership A sole proprietor can easily transfer the _________ of the business to others. 15% ownership Advantages of a sole proprietorship

13. Sole Proprietorship  Unlimited liability A sole proprietorship is not a ______ entity. This means the firm has no separate legal _________ from its owner. If the business fails, the sole proprietor may lose not only the ________, but also all his ___________. The owner is personally liable for the debts of the business _______ limit. Disadvantages of a sole proprietorship legal existence businesspossessions without

14. Sole Proprietorship  Little time to rest A sole proprietor has a great ____________ and a heavy __________. He has to work _____ hours with little time to rest.  Lack of skills Running a business requires a number of skills, including accounting, marketing and management. A single owner will probably not have all the skills necessary to develop the business well. responsibility workload long Disadvantages of a sole proprietorship

15. Sole Proprietorship  Lack of continuity The existence of the business always depends on the owner’s good _________. ________ or ________ means that the business may collapse if there is no one to carry it on  Lack of capital sources Many owners have to depend on _______, ________ profits, or get loans from relatives or friends. ________ and _________ institutions may not be willing to lend money to small firms for setting up a business. health Illnessdeath savingsretained Banksfinancial Disadvantages of a sole proprietorship

16. Sole Proprietorship  Competition from large businesses Big businesses can spend a lot of money on __________ and market _________ but it is difficult for a sole proprietorship to do so. Large businesses can afford ______ wars while small companies may suffer _______ if they reduce prices. advertisingresearch price losses Disadvantages of a sole proprietorship

17. Sole Proprietorship  Heavy burden of some unavoidable costs There are some costs all businesses have to bear, e.g. improving fire _______ or installing _________ sprinklers. For a small business, these costs may account for a large proportion of its total costs. escapes automatic Disadvantages of a sole proprietorship

18. Partnership AA partnership is an enterprise owned by at least ____ partners. UUsually, partnerships are formed by four to five partners. MMost partnerships provide ___________ services such as medical, accounting and legal services. two professional

19. Partnership Classified by liability  Limited partner limited liability Invests money in the business Does not take part in running it  General partner Unlimited liability Involved in the planning and management of the business Types of partner

20. Partnership Classified by the level of involvement in the business Types of partner Invest money Ownership Disclose identity Take part in running the business       Active partner Silent partner Sleeping partner Secret partner Nominal partner

21. Partnership  General partnership All the partners are general partners and have _________ liability.  Limited partnership Includes one or more limited partners. However, there must be at least one _______ partner with unlimited liability. Types of partnership unlimited general

22. Partnership  Number of partners There must be at least ______ partners.  Unlimited liability In case of limited partnership, there must be at least one general partner with ________ liability. Characteristics of a partnership two unlimited Lo, Liu, Ho & Co. Unlimited liability Limited liability

23. Partnership  Small scale of business Since the sources of capital are quite limited, the scale of business is usually small.  Bound by decisions made by others All partners are ______ bound by decisions made by any one of the general partners in the name of the firm and are held __________ for the consequences of the decisions. legally responsible Characteristics of a partnership

24. Partnership  Easy to set up Partners can start the business after signing a ___________ Deed and getting a _________ Registration Certificate.  Division of labour Each partner can contribute __________ knowledge and ability to the business. Through _______of labour, the business can be run more efficiently. Advantages of a partnership PartnershipBusiness specialised division

25. Partnership  More sources of capital Because there are more owners in a partnership. This leads to further and better development of the business.  Better chances of promotion The scale of partnership is usually ______ and it is easier to attract employees as they may have better chances of _________. Sometimes, capable employees may become _________. small promotion partners Advantages of a partnership

26. Partnership  Lower tax rate The profits tax rate for a partnership was only _____.  Sharing business risk The business risk will not be borne by one person only. 15% Advantages of a partnership

27. Partnership  Unlimited liability Unlike limited partners, general partners have _________ liability.  No separate legal existence A partnership is not a ______ entity. It does not have a separate legal ________ from its owners. It means that the business may close if a ________ partner withdraws, dies or goes ___________. Disadvantages of a partnership unlimited legal existence general bankrupt

28. Partnership  Lower operational efficiency Since decisions should be __________ to all partners, the flexibility and ________ of decision-making and the running of the business may be _______.  Bound by the decisions of others All partners are bound by the decisions made by any one of the _________ partner. A poor decision made by one general partner will affect the whole business. agreeable efficiency lower general Disadvantages of a partnership

29. Limited Company AA limited company has a ________ legal existence and is owned by _______ shareholders. IInvestors are called ___________ and their liability is _______ to the amounts of money they have invested. SShareholders do not necessarily run the business. TThey may appoint ________ for this purpose. EEvery limited company incorporated in Hong Kong is either a private limited company or a public limited company. separate many shareholders limited directors

30. Limited Company  Separate legal existence It is an entity with a ________ legal existence and is therefore ___________ of its owners. The company’s future is not threatened by the _______ or _______ of its owners.  More sources of capital It can raise capital by issuing ______. Banks are more likely to give _____ as its scale of operation is usually ______ enough to have the ability to repay the loans. Characteristics of a limited company separate independent illness death shares loans large

31. Limited Company  Limited liability Shareholders’ liability is limited to the amounts they have _________.  Restriction on the company’s name It must have the word ________ or _____ as the last word in its name. The Chinese name must have the Chinese characters _________ as the last four characters. invested ‘Limited’‘Ltd’ ‘ 有限公司 ’ Characteristics of a limited company

32. Limited Company  Separation of ownership and management Shareholders may not have the ______ and _____ to manage the company and so may elect ________________ to run the business. It is a usual practice for public limited companies since their shares may be transferred _________.  Large scale of business The number of ____________ and _________ may be huge. Also, with more sources of _______, limited companies are usually _______ in scale. abilitytime a board of directors frequently shareholdersemployees capital large Characteristics of a limited company

33. Limited Company Ordinary shares Preference shares Order of dividend receipt Dividend amount Voting right After preference shareholders Before ordinary shareholders VariableFixed YesNo

34. Limited Company  The shareholders have ______ liability, thus avoiding the loss of _______ assets.  It is a ________ legal entity. Changes in ___________ and _________ cannot affect the running of the company, so it has _________.  It is easier to raise _______ than a sole proprietorship or partnership, resulting in a better chance of ____________.  The business size is ______ than a a sole proprietorship or partnership so it is able to operate on a a ______ scale. Advantages of a limited company limited personal separate shareholders directors continuity capital development larger large

35. Limited Company  Setting up a limited company is complicated because more __________ are needed for registration.  It needs to pay a higher rate of profits tax (16.5%) than a sole proprietorship or partnership (15%) (for the year 2008 – 09)  The company’s structure may be so large and complex that the process of ______________ takes much time, resulting in a lack of _________. Disadvantages of a limited company documents efficiency decision-making

36. Joint Venture AA joint venture is formed by two or more entities to develop, _______ or sell products. TThe new entity is legally ________ from the partners in the joint venture. JJoint ventures are similar to partnerships except that they are formed to achieve some specific _________. FFirms forming a joint venture usually possess different types of ______, technologies, knowledge and ________. BBy pooling their resources together, they can do something much better than they do separately. produce separate purposes assets expertise

37. Joint Venture JJoint ventures formed by companies from different ________ are called international joint ventures. RReasons for forming international joint ventures Companies planning to enter ________ markets which they do not know will often form joint ventures with local companies. The local companies can provide information about the _______ market which is valuable to the foreign companies. International joint venture countries overseas local

38. Joint Venture  Coffee Concepts (HK) Ltd Starbucks Coffee Company (US) + Maxim’s Caterers Ltd (HK)  Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Co Ltd Hutchison Whampoa (China) Ltd (HK) + Guangzhou Baiyunshan Pharmaceutical Co Ltd What are the examples of international joint ventures?

39. Joint Venture 1 Formed by two or more entities (usually _________). 2 Companies usually bring in different types of assets, ___________, knowledge and expertise. 3 The entity formed by a joint venture has separate ______ status from the partners in the joint venture. 4 Partners in a joint venture are usually involved in _________ the business. 5 A joint venture can be terminated with the _______ of all the parties involved. Characteristics of a joint venture companies technologies legal managing consent

40. Joint Venture  Sharing risk The risk of launching ____ products can be shared between partners.  Economies of scale When two or more companies get together, they can increase their production _________ rapidly and lower production ________. Advantages of a joint venture new capacity costs

41. Joint Venture  Shared expertise Different knowledge and expertise possessed by companies can be used to produce and sell new products which neither of them can do alone. e.g. a computer software company and a film production company can form a joint venture to product digital films. Advantages of a joint venture

42. Joint Venture  More capital Companies can pool their ________ resources together.  Easier entry into new markets Companies often have difficulties in entering ________ markets which they are not familiar with. This problem can be solved by getting a ______ company which understands the local market as a partner. financial overseas local Advantages of a joint venture

43. Joint Venture  Disagreement among partners The partners may dispute among themselves about how to manage the business. This can affect the _________ of the joint venture and lead to poor performance.  Leaking of information As the partners have to ____________ with each other frequently, it may be difficult for them to prevent their ________ and _______ information from being leaked to other partners. Disadvantages of a joint venture operation communicate companyproduct

44. Joint Venture  Loss of autonomy No partner in the joint venture can make ________ on its own. It has to discuss matters related to the business with other partners and seek their ________. decisions consent Disadvantages of a joint venture

45. Franchise AA franchise is a business arrangement in which the __________ allows the _________ to sell its goods and services, in return for a ________ fee. Franchisor Franchisees Management training Franchise fee Management and promotion fees A wide range of support e.g. accounting, marketing, inventory supplies… franchisorfranchisee franchise

46. Franchise Examples of franchised business

47.  Support from the franchisor e.g. the franchisor helps the franchisees set up the accounting system and provides credit to purchase _________.  Control by the franchisor The __________ of the stores, such as product display and selling strategy, are _________ regularly by the franchisor. Characteristics of a Franchise inventory operations monitored

48. Franchise  Standardised operation The store’s look, staff _________, logos, products and ________ are standardised according to the franchisor’s requirements. uniforms prices The store’s look is standardised for all Saint’s Alp Teahouse. Characteristics of a Franchise

49. Franchise  Sharing of promotional expenses The franchisees share the cost of promotional campaigns which are carried out by the _________.  Well-known brand name Most franchises have built up a good _________ for their products or services.  Stores in different locations The franchise system operates as a ______ with stores located in different areas and cities. franchisor reputation chain Characteristics of a Franchise

50. Franchise  Franchisees can obtain support from the _________.  Franchised stores have built up __________. Their products are well-known and accepted by customers.  It is easy to set up the business as the franchisor provides a wide range of ________.  Franchisees enjoy the benefits of a large shop such as _______ costs when buying stocks in bulk.  The ____________ system of franchised stores helps establish goodwill quickly. Advantages of operating franchised shops franchisor goodwill support lower management

51. Franchise  Franchisees are required to pay ___________ and ____________ fees to the franchisor whether or not a profit is made.  Franchisees may rely too heavily on the ________ of the franchisor.  Some franchisors’ __________ are located overseas, so franchisees may find it difficult to communicate within a short time.  Franchisees may not have enough ____________ in operating their businesses. Disadvantages of operating franchised shops promotional management support head office independence

52. Public Enterprise  Public enterprises are wholly owned by the ___________.  In Hong Kong, they can mainly be classified into government _____________ and public _____________.  They provide the public with _________ goods and services. e.g. water supply, railway transport, healthcare government departmentscorporations essential

53. Public Enterprise  Owned by the government  Provides public services Characteristics of public enterprise

54. Public Enterprise  Government department The HKSAR Government is responsible for keeping _____ and _______ as well as providing _______ services. e.g. the Hong Kong Police Force is responsible for _________ and _________ crime. The Food and Environmental Hygiene Department is responsible for ______ safety and public _________. Types of public enterprise law order social preventingdetecting foodhygiene

55. Public Enterprise  Public corporation It is a _________ organisation incorporated by ________. It is wholly owned by the ___________ but it is self- financing and operates on a ___________ basis. It has a _________ legal existence. The government does not participate in the ______ running of the businesses but it exercises ___________. It appoints a ________________ to manage these public corporations. business statute government commercial separate daily supervision board of directors Types of public enterprise

56. Public Enterprise Airport Authority Hong Kong Responsible for the running and management of Hong Kong International Airport Ocean Park Corporation Responsible for operating Ocean Park Types of public enterprise

57. Public Enterprise  Easy to raise capital It is easier for the government to raise capital for big construction projects. Private enterprises have __________ in the government and will be more willing to invest.  Provides services to the general public e.g. the Water Supplies Department provides water, the Fire Services Department provides fire _________ and ________ services. Advantages of a public enterprise confidence preventionfighting

58. Public Enterprise  Narrows the income gap In the long run, providing essential services to the public may help narrow the _______ gap between the _______ and the _______.  Avoids wasting resources The government is able to ensure that there is no __________ and _________ of resources. Resources will thus be allocated more _________. income rich poor duplicationwasting effectively Advantages of a public enterprise

59. Public Enterprise Disadvantages of a public enterprise For all public enterprises For government departments only Lack of efficiency  as most of them do not face direct competition.  Since they are big enterprises, the decision-making processes are complicated and slow. Increase the burden of taxpayers  Losses made by them usually have to be borne by taxpayers. Not run on commercial principles  Their objectives are political, rather than commercial, because the government is responsible for making final decisions.

60. Major Differences between SMEs and MNCs in Hong Kong CharacteristicsSMEsMNCs Size Ownership Nature of business Management Relatively small in sizeLarge companies Most are sole proprietorships, partnerships or private limited companies. Most are listed public limited company. Most are involved in the businesses of import and export, retailing and catering… MNCs are involved in different businesses. The owners and their family members Professional managers

61. Major Differences between SMEs and MNCs in Hong Kong CharacteristicsSMEsMNCs Operations Finance Flexibility Most are labour-intensive operations and use relatively simply technology. Mostly capital-intensive and technology-based. Mostly financed by the owners’ personal savings. MNCs can raise capital by issuing shares and bonds, getting loans from banks etc. SMEs are more flexible because the owners can make decisions quickly. They can make changes to satisfy customer demands much faster. MNCs have more complex organisation structures and processes. They are slow in decision- making and making changes.

62. Private Limited Company AA private limited company is called private because its shares cannot be sold to the ________. IIt must have between 1 and _____ shareholders. IIt does not need to disclose its ________ information to the public. public 50 financial

63. Private Limited Company  If shareholders wish to sell their shares, they may be required to first offer them to the _______ shareholders of the company.  Otherwise, the board of ________ has the power to refuse to register transfers of shares.  Many private limited company in Hong Kong are ________ businesses.  They are set up to obtain _______ without losing ________ of the business. existing directors family capital control

64. Public Limited Company AA public limited company can sell its shares to the _______. TThe number of shareholders has no upper ______, but it must have at least ____ shareholder. IIt has to disclose its ________ information to the general public every year. public limitone financial

65. Public Limited Company  In Hong Kong, a public limited company can become a _____ company by applying to HKEx for listing.  The general public can then buy and sell shares of the company on the ______ market. listed stock

66. Private Limited Company Public Limited Company Number of shareholders Raising capital Disclosure of financial information Transfer of shares 1 - 50 At least one, no upper limit No need to disclose to the general public Need to disclose to the general public Freely and on stock market if listed Cannot be sold on the stock market Invite new shareholders to join or raise capital from existing shareholders More sources of capital: raise capital from existing shareholders; issue new shares to the public Comparison between public limited Company and private limited company

67. What are the advantages and disadvantages of a private limited company and a public limited company? Disclosure of information? Raising capital? Transfer of shares? Control over the company? Comparison between public limited Company and private limited company

68. Private Limited Company Public Limited Company Advantages No need to disclose a lot of information Comparison between public limited Company and private limited company Shares are not bought and sold freely. Less accounting costs on preparing financial statements are incurred. The legal and administrative procedures are less complex and costly. Easier to obtain loans because of its higher creditworthiness If the company goes public, more capital can be raised by issuing shares on the stock market The separation of ownership and management enables the company to get specialists to take up different roles.

69. Private Limited Company Public Limited Company Disadvantages More difficult to raise capital because of its lower creditworthiness Comparison between public limited Company and private limited company Shares cannot be easily transferred. Needs to disclose much more information The existing shareholders may lose control over the company if most of the shares fall into the hands of other parties. If the company goes public, the price of its shares will be affected by many factors.