Commerce
Question bank
Chapter 7
Section A
1
Types of business units
Short questions
One must submit the Memorandum of Association and the Articles of Association for setting up
a limited company. Identify the functions of these two documents, and list two items that should
be included in each document.
(6 marks)
Memorandum of Association is a document stating details of a limited company (1).
Information include:
(Any 2)
The name of the company (1), its registered address (1), its objectives (1), its capital (1) and its
stock holders’ responsibility on the company’s liability (1).
Articles of Association is a document which defines the rules and regulations by which a
company is run.
Information include:
How shares will be issued and transferred (1);
(Any 2)
The way in which meetings will be conducted (1);
The method of the election of directors (1);
The division of profits (1);
Rights and limits given to the holders of different shares (1).
2
Taking Kowloon-Canton Railway Corporation as an example, state the advantages of
government ownership.
(6 marks)
The cost of constructing the railway is beyond the resources of private enterprises (1). However,
the government has the resources to undertake such a large capital investment and provide the
essential services to the public (1).
Government ownership can prevent monopoly of the railway services (1). This makes people’s
life more stable and provides the government with a sum of revenue, which will be used for the
benefit of everyone (1).
 Oxford University Press 2001
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Commerce
Question bank
Government ownership can avoid duplication of services, such as construction of the same
route (1).
3
State the features of co-operative societies.
(6 marks)
They are small-scale enterprises owned and run by the co-operative members (1).
Their main purpose is not to maximize profit, but to provide benefit to all the society’s
members (1). For example, they sell goods to their members at lower than the market price.
Each member of co-operative has the right to vote, though only with one vote (1).
The profits are distributed to members according to either their shares or involvement (1).
Losses are covered by the membership fees (1).
A committee is usually elected by a general meeting of all members and this committee
appoints the chairman of the co-operative (1).
They are under control of the Co-operative Ordinance and Credit Union Ordinance (1).
(Any 6 points)
4
What are the advantages of a sole-proprietorship over a public limited company?
(6 marks)
It is easy and quick to set up a sole proprietorship. The only legal requirement is to register with
the Commissioner of Inland Revenue and obtain a Business Registration Certificate (1).
However, it is more expensive to set up a public limited company and the procedures are
complicated (1).
A public limited company must publish its annual accounts (1). This will affect its
competitiveness and make itself easier to be taken over (1).
The decision making process of a sole proprietorship is more effective. The owner can respond
to any problems arose directly without going through various departments (1). But for a public
limited company, a decision cannot be made without going through quite a number of
departments, such as the administrative, financial and executive departments (1).
 Oxford University Press 2001
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Commerce
Question bank
The organization of a sole proprietorship is simpler. It is easier to co-ordinate different jobs in it.
However, the complicated organization of a public limited company makes disagreement
among staff more likely (1).
(Any 3 points)
5
A public limited company has a high risk of being taken over. Why does a private limited
company still want to change to a public limited company?
(6 marks)
A public limited company can raise more capital for development (1) because there is no limit
for the number of shareholders (1).
A public limited company is better known by the public and enjoys a better reputation (1). This
strengthens the competitiveness of its products or services (1).
As the company is being listed, the original stockholders can take the chance to capture profits
previously gained, which has already been part of the company’s capital (2).
Section B
1
Long questions (20% each, 17% for content, 3% for effective communication)
Yau Ming Company puts up an advertisement on a local newspaper announcing the launch of
an Annual General Meeting for its shareholders.
(a)
Identify the type of business unit that Yau Ming Company belongs to, and state the
advantages of this type of business unit.
(9 marks)
Type of business unit: Public limited company (1).
Advantages:
Continuity (1): Even if the owner of the public limited company dies, the business will
continue to exist and be run by the Board of Directors (1).
Limited liability (1): Investors are only liable for the amount of their investment. Creditors
cannot claim their personal possession in case the company goes bankrupt (1).
Specialization (1): Because public limited companies can obtain more capital, they can hire
more professional workers for specialization (1).
 Oxford University Press 2001
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Commerce
Question bank
Ease of raising capital (1): A public limited company can raise more capital as there is no
limit to the number of shareholders (1).
Enjoys economies of scale (1): A public limited company is large in scale and thus enjoys
the economies of scale (1).
(Any 4)
(b) Describe the procedure for setting up this type of company.
(7 marks)
Prepare the Memorandum of Association (1).
Prepare the Articles of Association (1).
Submit the two documents to the Registrar of Companies (1).
Submit a legal statement which states that the registration process has been gone through
according to the law (1).
After verifying all the documents, the Registrar will issue a Certificate of Incorporation for
the company (1).
The company has to apply for a Business Registration Certificate from the Commissioner of
Inland Revenue within a month (1).
Invite investors (e.g. by publishing company prospectus) (1).
(c) In which document is the way of conducting a meeting being mentioned?
(1 mark)
Articles of Association (1).
2
Mr Wong runs a textile factory in the form of a sole proprietorship. He wants to bring in
partners as his business is expanding. He and his partners then should prepare a document
called the ‘partnership deed’. One of his partners does not want to reveal his identity to the
public, so he joins Mr Wong’s enterprise as a sleeping partner.
(a) What is a partnership deed? State the importance of this document.
(5 marks)
A partnership deed is a legal document stating the agreements among the partners (1). It sets
out the rights of partners and the division of profits (2).
The importance of the partnership deed:
There are different types of partners. The partnership deed clearly states which type each
partner in the firm belongs to (1), so that their rights and obligations will not be confused (1)
 Oxford University Press 2001
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Commerce
Question bank
(b) Apart from raising more capital, what other advantages can Mr Wong have after bringing in
partners?
(8 marks)
Advantages of partnership:
Partnership is a convenient way of bringing together people with different specialist skills
and wider experience (1) to strengthen the firm’s competitiveness (1).
A partnership can keep its affairs secret (1) as its annual accounts do not have to be made
public (1).
Partnerships are subjected to a lower profits tax than that charged on limited companies (2).
Limited partners can enjoy the advantage of limited liability (1). They are liable only to the
amount of their investment (1).
The partners can share the risks of running the enterprise (2).
(Any 4)
(c) Apart from not revealing their identities to the public, what other features do sleeping
partners have?
(4 marks)
Other features of sleeping partners:
They invest money in the firm (1).
They receive a share of profits and have to share any losses (1).
They are not involved in the operation and management of the business (1).
They bear limited liability (1).
3
Mr Ho wants to use his personal savings to set up a sole proprietorship for selling clothes.
(a)
What is a sole proprietorship? State the disadvantages of a sole proprietorship.
(10 marks)
Sole proprietorship is a business owned by one person (2).
Disadvantages:
Lack of continuity (1): When the owner dies, the business will cease to exist (1).
 Oxford University Press 2001
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Commerce
Question bank
Limited availability of funds (1): Mr Ho has to rely on his or his families’ resources to raise
money, which is very much limited. Financial institutions are usually not so willing to lend
loans to a sole proprietorship as the risk is high (1). These hinder the expansion of his
business.
Unlimited liability (1): Mr Ho has to bear unlimited liability, which means he is not only
liable to the amount of his investment in the busines s (1). In case his business goes
bankrupt, he will have to sell his personal possessions to pay the debts.
Lack of specialization (1): Running a business requires many different inputs, such as
decision making and financial management. One person is not likely to be good at
performing all these tasks (1).
(b) State the procedure for setting up a sole proprietorship.
(3 marks)
Register with the Commissioner of Inland Revenue (1)
Apply for the Business registration Certificate (1)
Buy moneymaking tools and stocks, hire workers, etc. (1)
(c) Besides using his personal saving, suggest other ways that Mr Ho can raise capital. Discuss
how effective they would be.
(4 marks)
He can borrow from friends or relatives (1), but the amount that can be raised is limited. (1)
He can also borrow from financial institutions (1), but he will usually be asked to provide
collateral (1).
 Oxford University Press 2001
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