The Legal Structure of
Business
DO NOW

Terms and definitions hand out complete.
Sole Trader





A business in which one person
provides the permanent finance.
They have full control of the
business
Keep all the profits.
Unlimited Liability – the owners
personal possessions and
property can be taken to pay for
the debts off the company.
Common business types –
hairdressers, builders, retail shops
etc
Partnerships






A business formed by two or more people to carry on
business together, with shared capital investment and
usually shared responsibilities.
Can have any number of partners (not usually more than
20-30)
Unlimited Liability
Business debts and errors are felt by all partners.
Most Partnerships have an agreement detailing what
each partners rights, responsibilities and profits are.
Common Business – Law and accounting firms
Group Activity

In groups of 4-5 you have the
advantages and disadvantages of being
a sole trader, put them under there
correct heading advantages or
disadvantages. (10 mins)
Advantages – Sole Trader
•Owner keeps all profits.
•Owner maintains full control
of the business.
•They are relatively
uncomplicated to set up and
the process is not costly.
Disadvantages – Sole Trader





Unlimited liability
Knowledge and skills are limited
Only one owner to provide finance for the
business which restricts growth.
It can be hard to borrow money (or interests
rates are high) as small businesses are
considered risky by lenders.
All the responsibility for the losses falls on the
sole owner.
Advantages - Partnership
More owners to provide capital so it is
easier to grow/expand
 Having many owners means more
connections to helpful people
(networking)
 Each partner can specialize in a part of
the business
 More ideas and skills

Disadvantages - Partnerships

Usually have unlimited liability. Note that in some
countries sleeping partners (or silent partners) may
request limited liability as they are not involved in
running the business
 Partners may disagree on decisions (conflicts and
compromises)
 If one partner dies the partnership is dissolved
(finished)
 Partners must share the profit
 Limited to 20 owners (In some countries)
 In some countries (including NZ) each partner can be
held responsible for all the debts ‘joint and severable
liability’
A case for Business Partnership

Read the case study and answer the
questions that follow. (15 mins)
Homework
Activity 2.1 page 21
 Blog Duty –Student to discuss today's
lesson, others to check and comment

DO NOW

Homework essay please hand in.
Homework Answer
•
Forming a partnership would increase
the finance available for expansion and
enable the business more easily to fund the
Accountancy firm ie (office space etc).
• There would be less reliance on debt finance
to fund expansion. Borrowing money from
Financial institutions increases the costs of
the business, as interest must be paid on all
borrowing.
Homework Answer

Jesse is unsure whether he would be
able to undertake all of the management
responsibilities for the expanded business.
Danielle may be able to fulfil
these responsibilities and may also bring
skills to the business that Jesse lacks.
• A partnership is easy to set up, requiring no
legal formalities to be completed. However,
Jesse would be advised to draw up a Deed
of Partnership if he proceeds
Homework Answers
• Jesse will continue to have unlimited liability and, moreover,will be
responsible for the decisions that his new partner(s) make(s). All
partners are bound by the decisions of any one of them. If he were
to form a company, then he would benefit from limited liability.
• He will have to share profits with his new partner(s).
•
if He wishes to leave the business to his sons. However, there is
no continuity with a partnership as it is dissolved on the death of
any one of the partners.
Knowledge 2
Application 2
Analysis 3
Evaluation 3
Limited Companies

The owners are called shareholders.
 You purchase shares within an organization
you could purchase 1 but usually in blocks i.e.
15000 shares.
 Shareholders receive a dividend payment
proportional to there shareholding.
 The company is a separate legal entity from
the shareholders meaning the shareholders
personal assets cant be touched if business
fails.
Private Limited Company
A small to medium sized company that is
owned by shareholders often from the
same family they cannot sell shares to
the public.
 DE Group
 www.degroup.co.nz

Advantages
The company has a separate legal entity
from the owner, which results in limited
liability.
 The original owners can keep control as
long as they don’t sell too many shares.
 Many shares could be sold to gain
money or finance.
 Unlike partnerships, if the owner dies the
company continues normally.

Disadvantages




You can only buy or sell shares with the permission of
all the other shareholders.
Legal costs to set up can be significant in some
countries. UK companies must prepare ‘Memorandum
of association’ (Rules of the company) and ‘Articles of
association’ (Details of the company). Note, in NZ
setting up a private company is quite easy and cheap.
Companies must also file their annual financial reports
with the Registrar of companies (A government
department)
As more owners join the business the existing
shareholders start to lose control.
Public Limited Company

A limited company, often a large
business, with the legal right to sell
shares to the general public – share
prices are quoted on the national stock
exchange eg Air New Zealand, Fletcher
Building
Advantages


The selling of more shares to the public
provides massive amounts of owners
investment
Limited Liability
Disadvantages




As ownership becomes more and more diluted, control over the
business is lost. It is possible for other shareholders to vote
against the original owners even voting them off the Board of
Directors (Divorce of ownership from control).
Note: Anyone could be a shareholder so it may be possible for a
rich buyer to buy more and more shares on the stock exchange
until they own the majority of the company. This may happen
beyond the control of the original owners.
The stock exchange has stringent standards which public
companies must meet in order to be listed. If companies no
longer achieve these standards they may be removed from the
exchange.
Annual Financial reports are available to all shareholders and
members of the public. Secrecy is reduced. Even the competition
may easily obtain these reports.
Footie Limited

Activity 2.2 Page 24 Questions
1,2,3,4,5,6
Footie Limited Q 1








Answers may refer to:
• There is greater disclosure of financial information with a public
limited
company (plc). A limited company must send its accounts to
Companies
House, whereas a plc must also publish its accounts.
• A plc is listed on the stock exchange and, therefore, it is easy to
buy and sell
shares. In contrast, it is more difficult to buy and sell shares in a
limited company.
• A plc can raise capital more easily as it is able to issue a
prospectus and off er shares
to the public. In contrast, a limited company cannot sell shares to
the general public.
Footie LTD Q2

The text refers to Footie Ltd’s planned
ballot of the owning family; therefore, it is
in the private sector as it is owned by
shareholders. Businesses in the public
sector are owned and controlled by the
state.
Footie LTD Q3







Footie Ltd operates in both the secondary and the
tertiary sector.
The business is in the secondary sector as it
manufactures shoes in its own
factories. Its involvement in the secondary sector has
declined in recent years; it
is implied in the case material that Footie Ltd is
outsourcing the manufacture of
shoes to firms in Asia.
Footie Ltd is also in the tertiary sector as it is a retailer
and wholesaler, owning
or franchising some 650 shops.
FOOTIE LTD Q4

To maintain current shareholder control of the
business
Footie Ltd is a long-established family business. It is
likely
that the directors are shareholders and have decided
that along with the other shareholders they wished to
retain control of the future direction of the business. In
a plc there is a greater divorce between ownership
and control.
If Footie Ltd became a plc, then the threat of takeover
would be greater than it currently is. Existing
shareholders had already rejected a takeover when
the business was in decline; now that the business
has recovered, and profits are rising, they may believe
that, financially, they are better off maintaining the
status quo.
Q4 Continued
Need to raise finance
 As the company has ‘no need of further
capital to fund further expansion’, there
would be little incentive to pursue a
public flotation with its attendant costs. A
public flotation is usually motivated by a
need to raise capital.

Q5


Benefit to the business
It would raise more capital. This could be used
to expand the firm more rapidly and
consolidate its position as the largest
conventional shoe brand in the world. There
would be no need to use debt finance for
expansion. Borrowing increases gearing and
means that the business has more debt to
service (pay interest on). This increases the
risk to the business if there is an economic
downturn as the interest will still have to be
paid.
Q5 cont
Benefit to existing shareholders
 It will be easier to sell shares that are
held and realize a capital gain. This
would enable shareholders to release
their wealth into a more liquid form. If
shareholders held on to their shares,
then they could benefit from a rapidly
increasing share value if Footie plc used
the capital effectively.

Q6 – Footie Ltd
• Reduced reliance on own manufacture − Footie Ltd has moved production
of its shoes from its European factories to factories in lower-cost
countries. Lower costs of production will have enabled Footie Ltd either
to become more price competitive, thus increasing sales, or to increase
profit margins.
• Investment in brand − this may have enhanced their brand image, which
could enable them to increase profit margins on sales. It could also
develop greater brand loyalty amongst customers leading to greater
repeat purchase of products and a willingness to pay relatively higher
prices.
• Investment in shops − this may have improved the shop environment,
gaining Footie Ltd a competitive edge and increasing sales due to more
satisfied consumers.
• Change in focus toward being a retailer first and foremost rather than a
manufacturer and a retailer − it is possible that Footie Ltd has focused on
its core strength as a retailer, thus enabling the business to grow and
become more
profitable. Footie Ltd is now ‘expanding rapidly in nearly all markets’.
Homework
Activity 2.2 page 24 4,5 and 6
 Blog Duty –Student to discuss today's
lesson, others to check and comment

DO NOW

List three advantages and disadvantages
of public and private limited companies.
Legal Formalities
Memorandum of association – name of
the company, address and the maximum
share capital of the organization.
 Articles of association – this document
covers the internal workings and control
of the business. Ie names of directors.

Other forms of business
Cooperatives – A large group of people
owning an organization i.e. Fonterra
owned by 14000 farmers. This helps with
economies of scale as they can often
buy in bulk to produce. Other examples
food stuffs.
 Cooperatives share the profits.

Franchises
A business that uses the name, logo and
systems of a successful business ie
subway, MacDonald's and body shop.
 http://www.youtube.com/watch?v=vaTH
Da5jqDI

Joint Ventures

Two or more businesses work together
on a particular project and create a
separate division to do so.
Holding Companies
A business organization which owns and
controls a number of businesses, but
doesn't unite them into one unified
company.
 I.e. Fletcher building

Public Sector Enterprises
A business enterprise owned and
controlled by the state.
 Generally make a profit.
 Government interferes in decision
making for political reasons.
 NZ examples would Be…

Activity – Water Babies

Read article and answer questions.
Homework
Question 5 and 6 page 37 Business
Studies text book.
 Blog Duty –Student to discuss today's
lesson, others to check and comment
