Page 50 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 1 Understanding business activity

ACTIVITY 4.1

Chata is a sole trader. He owns a bakery which supplies bread products and cakes to local supermarkets and independent
retailers. His cakes are very popular. In recent months Chata has had to turn down orders from existing customers because
he is unable to produce enough cakes with the equipment he has available. Chata was discussing his problems with Juma,
an old friend from catering college.
Juma is looking to start his own business making chocolate. He has suggested to Chata that they go into partnership.
Chata has $10,000 to invest in the business, which he says can be used to buy additional equipment for Chata’s bread and
cakes, but also for Juma’s chocolate production.
Discuss the advantages and disadvantages to Chata of entering into partnership with Juma.

KEY TERMS Private and public limited companies

Unincorporated business: Sole traders and partnerships are unincorporated businesses, which means that
a business that does not the owners are responsible for the debts of the business. Th ey have unlimited
have legal identity separate liability. Another form of business organisation is the limited company. Th e
from its owners. The owners advantage of this type of business over a sole trader or partnership is that the
have unlimited liability for people who run the business are not responsible for the business’s debts. A limited
business debts.
company is owned by its shareholders. These are investors who invest money in the

Unlimited liability: if an
unincorporated business fails, company in exchange for shares.

then the owners might have There are two main types of limited company:
to use their personal wealth to
■ Private limited companies
finance any business debts.
48 ■ Public limited companies.
Shareholder: a person or
organisation who owns shares in
a limited company. Private limited companies and public limited companies share the following
features:
Private limited company:

often a small to medium-sized
■ Legal documents, including Articles of Association and a Memorandum of
company; owned by shareholders
Association, must be completed when setting up the business.
who have limited liability. The
company cannot sell its shares to ■ Shareholders invest their capital by purchasing shares in the company.
the general public. ■ Ordinary shareholders are the owners of the company.
Public limited company:
■ Shareholders have limited liability. If the business fails, they risk losing the value of

often a large company; owned by
their shares – that is the amount of money they have invested in the company.
shareholders who have limited
liability. The company can sell its ■ The business continues even if one or more shareholders die.
shares to the general public. ■ The company can raise finance by selling shares.
Ordinary shareholders: the ■ Profit belongs to the ordinary shareholders.
owners of a limited company.
■ Profit is shared between the shareholders through the payment of dividends.
Limited liability: the
■ Shareholders vote on major decisions taken by the company.
shareholders in a limited liability
company which fails only risk ■ End of year financial statements must be produced and submitted to the correct
losing the amount they have authorities. The company’s financial accounts are available for the public to
invested in the company and not look at.
any of their personal wealth.
Dividend: a payment, out of Differences between private and public limited companies

profits, to shareholders as a

reward for their investment. There are some important differences between a private limited company and a
public limited company, as shown in Table 4.1.