Mindset for Examination

Compulsory Part Business Environment

Relevant Chapter CH2 Forms of Business Ownership

1. Which of the following statements regarding limited companies is correct?

A. A limited partnership is a type of limited company.

B. Limited companies have to publish their financial statements.

C. Limited companies cannot be part of a joint venture.

D. The profits tax rates for all limited companies is the same.

Students should not be confused

by the word “limited”.
Students may think that the five types of private
enterprise (sole proprietorship, partnership, limited company, joint venture and
franchise) are mutually exclusive.

Option (A) is not correct. A limited partnership is not a type of limited company.
Option (B) is not correct. A private limited company does not need to publish its
financial statements.
Option (C) is not correct. A joint venture can operate in forms Joint venture has nothing to do
with whether a company is a
of a limited company. limited company.

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2. Which of the following statements regarding a joint venture is correct?

A. Forming a joint venture would increase the risk of leaking the trade secret.

B. A joint venture only applicable to retail businesses.

C. Each partner of a joint venture has to share the profits evenly.

D. The partner of a joint venture has to pay a monthly royalty fee.

Students may have a misunderstanding that partners Students should have a good understanding
of the characteristics of a joint venture.
in partnership and joint venture have to share the profits
equally as they have to contribute the same amount of resources into the businesses.

Option (A) is correct. The risk of leaking trade secrets increases when sharing product
information with partners.
Option (B) is not correct. A joint venture is applicable to different industries, such as
property development and food manufacturing.
Option (C) is not correct. An agreement would be formed with the partners to decide on
how profits should be shared.
Option (D) is not correct. Only franchisees have to pay monthly royalties.

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3. Which of the following statements is correct?

A. The maximum number in a partnership is less than a private limited company.

B. The shareholders of a public limited company are responsible for managing the
company.

C. A limited partnership is a legal entity.

D. Nominal partners do not invest in the company.

Students may think that the upper limit for the number in owners of a partnership is 20,
while in a private limited company it is 50.

Students may think that a limited partnership is similar to a limited company. They
think they are both legal entities.

There has been no upper limit for the number of

owners in a partnership since 2004.
Option (A) is not correct. There is no upper limit for a
Partnership. The maximum number of shareholders is 50 in a private limited company.
Option (B) is not correct. The shareholders in a public limited company elect a board of
directors to manage the company.
Option (C) is not correct. A limited partnership is not a legal entity.
Option (D) is correct. Nominal partners do not invest in the company. Their
participation usually improves the image of the firm.

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4. Alice, Bob and Cathy have set up a business with the following features:
 The maximum losses of every owner are limited to the amount they have
invested in the company.
 The transfer of ownership requires the consent of all owners.
 The financial information does not need to be disclosed to the public.

(a) Identify which form of business ownership this business belongs to.(1 mark)
(b) State TWO advantages and TWO disadvantages to the owners of this type of
ownership over sole proprietorship. (4 marks)

(a) Limited partnership A limited partnership must have at least

one general partner.
(b) Advantages:
- Can raise more money
- Share of risk among partners
Disadvantages: Wider source of capital does not imply
that a business can raise more money.
- There may be conflicts between partners.
- Limited partners cannot take part in the management of the business.

(a) Private limited company

(b) Advantages:
- Wider source of capital
- Continuity of business
Disadvantages: Only public limited company has to disclose
financial information to the public.
- Higher profits tax rates
- A more complicated set-up procedure
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5. Amazing Car is a United States car manufacturer, listed on the Hong Kong Stock
Exchange. Rex, the chairman of the board of directors, has suggested forming a joint
venture with a mainland China car manufacturer in order to enter the China market.
However, a business consultant is worried that the production technology will be
leaked to other parties.
(a) What is a joint venture? (1 mark)
(b) Explain one advantage of forming a joint venture when entering the China
market. (2 marks)
(c) List two factors that are considered when forming a joint venture. (2 marks)

(a) A joint venture refers to a business that is operated by two or more businesses
jointly.
(b) Advantage:
- Lower tax rates than a limited company A joint venture can be established in forms of sole
(c) Factors: proprietorship, partnership or even a limited company.

- Leaking of confidential information

Leaking production technology is already
- Availability of partners to form a joint venture shown in the question.

(a) A joint venture is an agreement between two or more businesses to form another
entity for the production and / or sale of a product or service.
(b) Advantage:
- Lower risk: less capital investment is required compared to forming a
business.
(c) Factors:
- Conflict over the operation
- Coordination problems due to different cultural backgrounds

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