Chapter 3 Ownership of firms

Firms: A planning unit of production. It makes decisions regarding the employment of factors of
production and the production of goods and services.
Plant: A physical location where production takes place.

Public enterprise: A firm that is wholly owned, operated and managed by the government
or its agencies. (3 types)

(1) Government departments

-directly financed and operated by the government
-example: Inland Revenue Department, Census and Statistics Department

(2) Government departments financed by trading funds

-a sum of money (trading funds) given to the department, and the department has to run with
the trading fund
-example: Hongkong Post

(3) Public corporations

-set up and wholly owned by government
-financially independent of the government
-example: Airport Authority Hong Kong

Benefits:
1. Adequate and stable sources of capital from government for operation
2. Better access to information and government statistical data (for business decisions)
3. Reliable supply of goods and services at lower price (since it does not aim at maximising
profit)
Problems:
1. Higher average production costs (due to larger scale and extra administrative costs)
2. Damage the principle of ‘Small government, big market’

Private enterprise: a firm that is privately owned

Sole proprietorship* (spelling)
Partnership
Limited company

Sole proprietorship v.s Partnership

Similarities (advantages):
1) Simple set up procedures
2) Lower profit tax than limited company
3) Accounting information can be kept secret
4) Closer relationship with employees or customers

Similarities (disadvantages):
1) Not a legal entity: Contracts and agreements are made in the name of the owner
2) Unlimited liability: The liability is not confined to the initial investment. The owner is
responsible for the firm’s outstanding debts and use personal property to settle them.
3) Limited Continuity: If the owner dies /Firm ownership transferred/ Partner added or left the
partnership, the firm is considered as a new firm. It hinders long term planning and
development.

Differences:

Sole proprietorship Partnership

Decision making Requires less time (made by Takes more time (partners may
one person) have different views)

Collective Nil (all contracts are signed by Apply to all partners (even
Responsibility one person) without prior consensus)

Sources of capital*** Less More

Specialization Nil Different partners may have

different skills
***Sources of capital does NOT mean amount of capital. It simply means partnership may
have more friends / relatives to get loans from. If a sole proprietor is a billionaire, it will have
more capital than a normal partnership.***

Limited Company vs Partnership / Sole Proprietorship

Limited Company Partnership / Sole proprietorship

Legal entity? Yes (company is like a person, No

it can sign contracts / sue)

Limited Liability? Yes (shareholders are not No

responsible for its debts)

Continuity Longer (shareholders quitting / Shorter

joining does not affect)

Set-up procedure More complicated Less complicated

Profit tax Higher Lower

 Management Separated (shareholders do not Done by partners / sole proprietor
manage, board of directors
elected from AGM manage)

Sources of capital Wider (shares and bonds) Fewer (borrowing money)

Private limited company vs Public limited company

Private Public

No. of shareholders 1-50 1 or above

Sources of capital Cannot issue to the general Can issue to the general public
public

Transfer of Requires consent of other Does not require consent

ownership shareholders (less likely to be (listed company** shares may
taken over) be traded on stock market)

Accounting Kept secret Disclose to public

information
**Listed companies are public limited companies. But NOT ALL public limited
companies are listed companies. Listed companies are under stricter control and
regulations.**

Usually, the question may state a scenario (changing of ownership, like from partnership to
private limited company). Then it will ask you to state the benefits and disadvantages of the
change.
Shares: certificates of ownership which represent the ownership of shareholders in a listed
company. Return: Dividends Role: Owners
Bonds: certificates of debt issued by a limited company to raise capital.
Return: Interest Role: Credictors (Lender)

Shares vs Bonds (TO COMPANIES)

Ordinary shares Bonds

Advantages No obligation to pay dividend. The control over company will not be
Better flexibility to retain profits for diluted. The risk of taking over the
company development. company by others decreases.

There is no maturity date. The

company has no obligation to
redeem the shares.

Disadvantages The control of existing The company is obliged to pay fixed

shareholders over the company is rate of interest even if it is suffering
diluted. The risk of being taken from losses.
over by others increases

The company has obligation to

redeem the bonds from bondholders.
(basically shares advantages = bonds disadvantages etc)

Shares vs Bonds (TO INVESTORS)

Ordinary shares Bonds

Advantages Owners of firm, therefore, have The rate of return from bonds is more
voting rights in AGM. certain. They receive interest even if
the company suffers from losses

Dividend rate is not fixed, they Bondholders claim repayment prior to

MAY have higher dividend rate if shareholders if the company winds up (執
the company make huge profits 笠)

Disadvantages Rate of return is uncertain Bondholders have no voting rights in

AGM

Ordinary shareholders are the

last to claim repayment if
companies wind up.

Points: The effects to COMPANIES and INVESTORS are different. Make sure you do not mess
it up.