Appropriateness of Different Forms of Ownership
Privatisation
- Privatisation is the transfer of a business, industry, or service from public to private ownership and control.
- Growth:
- Businesses typically start small and gradually increase in size.
- Most businesses change their legal status as they grow.
- Growth often necessitates raising more capital.
- Sole traders may find it difficult to raise capital alone.
- Businesses may take on a partner or become a private limited company to access more finance options.
- Later, they can become public limited companies to raise even more capital.
- Size of the Business:
- Many small businesses operate as sole traders or partnerships.
- Public Limited Companies (PLCs) are much larger, with thousands of employees and huge turnover.
- Need for Finance:
- Linked to growth; the need for finance often drives changes in the type of organisation.
- The only way to get more money to facilitate growth is to change the type of organisation.
- Control:
- Some owners value their independence and prefer to remain sole traders.
- Establishing a partnership means losing some individual control.
- While holding a majority of shares (e.g., 51%) in a limited company allows an owner to retain significant control, they must still consider the interests of other shareholders (e.g., the remaining 49%).
- Limited Liability:
- Owners can protect their personal finances by operating as a limited company.
- Sole traders and partners have unlimited liability.
- This means the owner is personally liable for all business debts.
- The owner's personal assets are at risk if the business cannot pay its debts.
- Owners may transition to limited companies to gain greater financial protection.
- Objectives and the Type of Organisation:
- Organisations have different objectives.
- A small sole trader may be content with making just enough profit for a comfortable lifestyle which is called profit satisficing.
- Family-run and small businesses may avoid going public to retain control, limiting their growth, prioritizing some objectives over others.
- Multinational companies typically aim for continuous growth to dominate the global market.
Exam Practice Questions
- (i) Discuss one likely benefit to a company of becoming a public limited company. (3)
- (ii) Analyse one likely problem for the shareholders of a company if it becomes a public limited company. (3)
Mark Scheme - Benefits of Becoming a Public Limited Company
- Raise More Capital (1):
- Can sell shares to the public on the stock exchange (1).
- No interest paid on capital used to expand (1).
- More Well-Known Company (1):
- Shares are quoted on the stock exchange (1).
- May lead to increased sales due to increased reputation (1).
- Marking: 1 mark for benefit, 2 marks for reason/development.
Mark Scheme - Problems of Becoming a Public Limited Company
- May Be Taken Over (1):
- Shares can be bought by anyone, including rival companies (1).
- May lead to a loss of control for the original owners (1).
- Cannot Keep Financial Information Private (1):
- Accounts have to be published (1).
- Information may be of use to competitors (1).
- Marking: 1 mark for identifying problem, 1 mark for development, 1 mark for analysing the relevance to shareholders.
Key Concepts:
- Unlimited Liability: A legal structure where the business owner is personally responsible for all business debts. There is no legal distinction between the assets of the business and the assets of the owner.
- Limited Liability: A legal structure where the business owner is only liable up to the amount of their investment. The owner's personal assets are protected from business debts.
- Profit Satisficing: A business objective where the aim is to make enough profit to satisfy the owners' needs or maintain a comfortable lifestyle, rather than maximizing profit.