Business Environment and Introduction to Management – Notes to students
Ch.2 Forms of Business Ownership
Limited liability: Limited liability means the liability of an investor is limited to the amount of his
investment. He does not have to pay off the debts of the business with his personal
belongings.
Unlimited liability: ?
Characteristics
Sole  Owned by one person
Proprietorshi - usually small scale
p - usually managed by the owner
 Unlimited liability
- not a legal entity
- if the business fails, the owner
is responsible for settling all
the debts.
Partnership  Owned by at least two partners
 Unlimited liability (except limited
partners)
 All partners are legally bound by
the decisions made by other
partners
 Limited partner
Pros
 Efficient and flexible
operations
- there is only one person
to manage the business,
decisions can be made
very quickly
 Simple set-up procedures
and low set-up costs
- Business Registration
Certificate
 The profits tax rate for sole
proprietorship (15%) is
lower than that for limited
company (16.5%)
 Close relationship with
customers and employees
 Simple set-up procedures
and low set-up costs
- Business Registration
Certificate
- partnership agreement
(optional)
(Partnership Ordinance)
 More sources of capital
when comparing with
Cons
 Unlimited liability
- the owner may have to
sell his personal
belongings to settle the
debts of the business
 Lack of continuity
- the business may
collapse if there is no
one to carry it on
 Lack of skills
- marketing, accounting,
management, etc
 Lack of capital sources
- banks may not be
willing to lend money
to small firms such as
a sole proprietorship.
 General partners have
unlimited liability
 No separate legal
existence
- a partnership would
dissolve if a general
partner withdraws
 Lower operating
 - has limited liability (limited to
the amount invested in the
business)
- does not take part in running
the business
 General partner
- has unlimited liability
- take part in running the business
 Nominal partner
- no investment in the business
- does not own the business
- does not take part in running
the business
- disclose his identity
- does not share the profits
Characteristics
Limited  A limited company has a separate
company legal existence
 The shareholders of a limited
company have limited liability (their
liability is limited to the amount they
have invested)
 The ownership is divided into shares
- ordinary shares
- dividends not fixed
- have voting rights at the annual
general meeting (AGM)
-preference shares
- fixed dividends
- receive dividends before
ordinary shareholders are paid
- no voting rights at the AGM
 Shareholders may appoint directors
to run the business (separation
of ownership and management)
sole proprietorship
 Division of labour
- each partner can
contribute his knowledge
and skills to the business
 The profits tax rate for
partnership (15%) is
lower than that for limited
company (16.5%)
 The business risk is shared
by several partners
Pros
 Shareholders have limited
liability
 It has continuity because it
is a separate legal entity
(changes in shareholders
and directors will not affect
the company)
 More sources of capital
- able to operate on a large
scale (lower average
production cost)
efficiency than sole
proprietorship
- it takes time for the
partners to discuss
and make decisions
 Bound by the decisions
of other partners
- a poor decision made
by a partner may
adversely affect the
whole business
Cons
 More complicated to
set up (more documents
are required for
registration)
 Lower efficiency
 Higher profits tax rate
  Private limited company
Public limited company (P.59,65)
 The company name must end with
the word ‘Limited’ or ‘Ltd’
Joint  A firm created by two or more firms
Ventures to develop, produce, or sell products
 Can be a partnership or a limited
company
 Partners usually contribute different
types of assets, technologies,
knowledge and expertise
Franchise  Support from the franchisor
 Standardised operation
 Brand name well regarded by
customers
Public  Wholly owned by the government
enterprise 1. government department
- Trade and Industry Department
2. public corporation
- incorporated by statute
- financially independent of the
government
- Ocean Park Corporation
- Airport Authority Hong Kong
 Describe the characteristics of multinational corporations in Hong Kong. (P.79)
 Shared expertise (neither  Leaking of information
firm can do it alone)
 Loss of autonomy
 Easier to enter into new
market  Disagreement among
partners
 Sharing the risk of
launching new products
 Easy to set up (with the  Need to pay management
support from franchisor) fee whether or not a profit
is made
 Enjoy the benefits of a
large shop (lower costs)  Loss of autonomy
 Well-known to customers
 Easy to raise capital  Lack of efficiency
(increase the burden of
 Provides essential goods taxpayers)
and services to the general
public (to narrow the
income gap)