F6NoteHS 2

HKAL BUSINESS STUDIES
SECTION 2
FORMS OF BUSINESS OWNERSHIP
A)
PRIVATE
ENTERPRISE
ENTERPRISE
SYSTEM
VERSUS
PUBLIC
The private sector or private enterprise is the term used to

describe all businesses that are owned by individuals or groups
of individuals and run essentially or-profit.
Public enterprise refers to the public-sector business

organizations that are owned by the government or some other
public bodies (for example universities, Urban/Regional
Council).
B)
CHARACTERISTICS OF PRIVATE ENTERPRISE SYSTEM
1)
Private ownership
The ability to produce, buy, and sell goods for a profit is rooted
in private ownership of property
The profit motive is based on this right to own and to dispose of
property. Since individuals can use things they own as the see fit
they are free to use them for their own private gain, if they so
choose.
2)
Free Choice
Pure competition implies free choice for both consumers and
producers. Consumers may decide to buy or not to buy a
product and may buy it from any supplier they choose.
Manufactures and distributors are also free to produce or sell
the goods they believe will be most profitable.
Individual freedom extends further. Under private enterprise

system, people are free to pursue any occupation they choose.
3)
Private profit
The hope of making private profit and of creating more personal
wealth is the main reason businesses are started and continue
to operate. Without private profit, entrepreneurs would not be
Section 2 Forms of Business Ownership

Form 6 Business Studies

encouraged to use their skill and creativity to meet consumer
demands.

4)
Free Competition
In an economic system with freedom of choice, competition will
develop among producers of the same or similar products. All
buyers and sellers operate in competition with other buyers and
sellers of the same goods and services.
In a competitive situation, companies often try to attract
customers by offering better service, warranties, financing, and
other benefits. Competition encourages business managers to
produce a better product for the same price and leads to
efficiency in production and management.
C)
COMMON FORMS OF BUSINESS OWNERSHIP
I)
Sole Trader (Sole. Proprietorship)
The sole proprietorship is a form of business that is owned and

controlled by as single individual. He or she receives all of the
profits and assumes all the risks of operating a business. He or
she will be personally responsible for the financial liabilities of
the enterprise. It is the simplest, oldest and most easily formed
of all types of ownership. Many small businesses are initially set
up in the form of sole trader.
Characteristics of sole trader:
Ownership: The business is owned by a single individual.
2.
Management: Although a sole trader may employ some

workers, the business is usually managed by the owner.
However, some owners may delegate management but
remain overall control.
3.
Finance: The proprietor must accumulate enough capital

to start and run a business from personal resources, loans
secured by personal credit, or a combination of the two.


4.
Unlimited liability: A proprietor is personally responsible

for paying all debts and charges that may arise from the
operations. Not only the assets of the business but also
the proprietor's personal assets may be used to satisfy
business debts.
5.
Small size: Business owned and operated by a sole trader

are likely to be those in which entry is easy, requiring
neither large capital expenditure nor great technical
knowledge.
Formation of sole proprietorship in Hong Kong

-
The legal procedure for setting up a sole proprietorship is

simple. Under the Business Registration Ordinance, a sole
proprietorship is required to register with the Business
Registration Office of the Inland Revenue Department and pay
an annual registration fee. He will then be issued a Certificate
of Registration and can start his business. This certificate must
be displayed at the principal place of business.
Advantages of sole proprietor

1.
Ease of formation and dissolution, a proprietorship is easy to

start, since there is no need to make a contract with other
owners. There are only a few legal restrictions. Dissolution,
termination, or sale of the business is equally simple in most
instances. Satisfaction of creditor claims is usually the only
restriction in winding up the business.
2.
Flexible management. Promptness in executing policies, in

changing methods, and in meeting new opportunities mark the
proprietorship as the most flexible of the ownership types. This
is the result of the fact the management and control are
centered in one person. Hence, action can be taken with
maximum speed and minimum friction.
3.
Sole claim on profits - a stimulant to personal incentive. The

owner receives all of profits. He or she also absorbs any losses.
4.
Favorable credit standing. Since the owner is personally

liable for all debts of the proprietorship, this form often enjoys a


favorable rating among creditors if the proprietor has valuable
personal assets (a home, stock and bonds).
5.
Preferential treatment by government.

The
proprietorship remains comparatively free from government
regulation. No permission is needed to enter most types of
business. There is also no requirement for them to disclose their
information to the public: For the payment of tax, the profit of a
sole proprietorship is regarded as the earnings of the owner and
is subject to personal tax. As the personal tax rate is lower than
the corporate tax, less amount of tax would be paid by sole
proprietorship.
Disadvantages of sole proprietorship

1.
Limited size. The size of a sole proprietorship is limited by the

amount of capital the owner can raise. This is the sum of money
already on hand, plus what may be borrowed.
2.
Unlimited liability for debts. The claims of creditors against

business might exceed the value of its assets. In this case, the
personal property of the owner may be taken to pay the
business debts.
3.
Lack of continuity Since the business and the owner are

inseparable, disability may force temporary or prolonged
closure. Death, imprisonment, or insanity automatically
terminates the operations of the firm.
4.
Limited management ability. Every business has many basic

functions that must be performed in order for it to be
successful. Among them are buying, selling, advertising,
accounting, insurance, credit and personnel management. The
sole owner is responsible for these things even though he or she
is not competent in all areas.
II)
Partnership

Partnership is defined as an association of two or more persons

to carry on as co-owners of a business or profit.
It is a voluntary pooling of resources of two or more people into

a business enterprise. The amount of capital invested need not
be the same for each partner. Indeed, some partners invest no
money but instead contribute only their services or their names.
Characteristics of partnership
1.
There may be between 2 to 20 partners, except in a

professional partnership. (e.g. solicitors, accountants)
where there is no upper limit.
2.
Partners may contribute property, skill or labor and is

entitled to share profits and losses.
3.
Regardless of the amount of investment, each partner

shares equally in profits and losses, unless other
arrangements have been specified in contractual
agreement among the partners.
4.
Any agreements in relations to ordinary course of

business, made by one partner on behalf of the
partnership, bind all the partners.
5.
It is not a legal entity.
6.
All partners have equal right in the management of the
7.
Partners usually enter into an agreement, or deed,

outlining the nature of the business and the rights and
obligations of the partners.
firm.
Formation of partnership
1.
Basic to all general partnerships is an "agreement of

intent". They may be oral, written, or implied by the
actions of the partners. It is best to draw up a partnership


agreement in a legal document called a Deed -of
Partnership which is witnessed by a solicitor: However, a
written agreement is not necessary by law but is obviously
very useful if a dispute arises over the terms of the
partnership.
2
For general partnership, partners need to register with

the Business Registration Office of the Inland
Revenue Department and pay an annual registration fee.
A Certificate of Registration will then be issued.
Deed of partnership
Although not legally required, partners can have better
protection if there is a written agreement when starting a
business. Written agreements vary in content, but most
partnership contracts contain the following provisions:
1.
Name of firm and names of partners.
2.
Location and type of business
3.
Period of time covered by the agreement
4.
Amount and type of capital contributed by each partner
5.
Methods of distributing profits and losses, among partners
6.
Salaries, drawing accounts, and interest allowed on
capital invested
7.
Powers and limitations of the partners in management of
the firm
8.
Procedures for the admission and withdrawal of partners
and for
dissolution of the business.
Advantages of partnership
1.
Multiple sources o f capital.

The financial resources of
several owners in a partnership can be expected to exceed those
of a sole proprietorship. This provides greater financial strength
in starting and expanding a business. As more permanent
capital is needed, partners may be added. In addition, the
combined credit resources or borrowing capacity, are enhanced
through multiple ownership.
2.
Diversification of management The distribution of duties

and responsibilities among two or more owners promotes
specialization. Each partner can perform those functions for
which he or she is best qualified. Also, the partners can consult
with each other to `iron out' business problems.

3.
Possibilities of growth and expansion. Diversification in

management and multiple sources of capital enhances the
prospects for a firm growth and for expansion into new products
or markets. A partnership is in a favorable position to retain and
recruit key personnel by admitting as partner member of the
staff who demonstrates outstanding loyalty and ability.
4.
Improved credit rating. As each general partner has unlimited

liability for the debts of the business, suppliers are much more
willing to provide credit.
5.
Preferential treatment by government.
Disadvantages of partnership
1.
Joint and Unlimited liability. Under normal circumstances,

every partner is personally liable for all the debts and liabilities
of the partnership to an unlimited extent, even if such debts and
liabilities were incurred by the other partners without his/her
knowledge or consent.
2.
Conflict in authority and control. With authority spread

among two or more owners, it is easy for disputes to arise, and
unresolved disputes may lead to termination of the business.
3.
Lack of continuity. The death of a partner dissolves the

business. Further, the physical or mental disability of one
partner may force an end to the business.
4.
Frozen investment. It may be most difficult to withdraw your

funds from the business when it is running. Even when other
factors are manageable, it may be hard to agree upon a fair
price for each partner share.
5.
Shared profits. The profits of the business should be shared
among partners.
III)
Limited Company

A limited company is a separate body in law from its

shareholders and directors. The company may form contracts,
sue and be sued in its own name. The shareholders are not
liable for the company debts except for the value of their
shareholdings.
Types of limited company
1.
Private limited company
2.
Public limited company
Important features of private limited companies:

1.
A private limited company has 1 to 50 shareholders.
2.
They are usually, but not always, small family concerns.
3.
The name of the company must be registered with the

Registrar of Companies and it must end with the word
`limited'.
4.
They are not allowed to offer shares to the general public.

This means that a private company cannot publicly invite
people to buy the company shares.
5.
Shareholders may not be able to sell their shares without

the agreement of the other shareholders.
Important features of public limited companies:

1.
A public limited company must have at least

shareholder, but there is no upper limit on the number.
2.
The shares can be traded openly in the stock market.
3.
A public limited company is run by a Board of Directors

elected by the shareholders. Shareholders do not have
direct involvement in the management of the business.

Formation of limited company
1.
The name of the company.

. The company has to apply to the
Company Registry to see if the name is available. There are a
number of prohibited names.
2.
Documents for the Registrar General. A number of documents

need to be delivered to the Registrar. These include::
Memorandum of Association. The Memorandum spells out

the nature of the company which viewed from the outside.
Someone reading the memorandum would be able to get a
general idea of what the company is and the business line it is
concerned with.
Articles of Association. The Articles of Association set out the

rules that govern the inside working of a company.
3.
Once a private company has lodged these documents and had

them be accepted, it will be granted a Certificate of
Incorporation and can start to trade. The Certificate of
Incorporation sets up the company as a legal body in its own
right. The company (not the individual shareholders) enters into
contracts and can sue or be sued in a Court of Law.
4.
To be a public limited company, there are some qualifications

(Please visit www.sehk.com.hk =>regulations =>chapter 8). For
a public limited company, the next step is to issue a prospectus,
which is an advertisement or invitation to the public to buy
shares in the company. This prospectus is required to be
submitted to the Registrar and the Hong Kong Stock Exchange
for approval. Then the shares of the company can be listed and
traded in the stock market.
Main types of shares

Both private and public limited companies can issue the
following types ofshares to raise capital:
1. Preference shares
-
shareholders receive preference in payment of dividend which is

at a fixed rate and, in the event of a winding up, in repayment of
capital.

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usually carry no voting rights at general meetings
2. Ordinary shares
-
shareholders receive dividends only after

shareholders have
been paid in full.
the
preference
they are entitled to the remainder of the assets, in the case of

winding up, after the rights of preference shareholders have
been met.
having voting rights, one vote for one share.
Advantages of limited company:

1.
Limited liability. The key advantage of limited company is that

shareholders are limited in liability to the extent of their
investment. In other words, their personal wealth is safe from
the claims of creditors if the limited company fails.
2.
Ease of transferring ownership. Shareholders of a limited
company can
transfer
their ownership simply by selling their
shares of stock. For public
limited
companies, their shares are
publicly traded and listed in the stock
exchange market.
This
makes it easy for people to buy or sell their shares.
3.
Continuity of life. A limited company stays in business even
though an owner or officer dies or retires. We might say that a limited
company has perpetual existence.
4.
Specialized management. We note those well-established
limited companies
are often managed by officers, not by owners.
The shareholders elect the Board of Director, which hires the
company officers. The officers then employ people to
manage
particular phases of the business. This gives the business expertise in
vital areas such as production, finance, purchasing and
marketing.
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5.
Large financial capability. Limited company has more options

to raise fund. It may borrow money for a short period, or it can
raise money by selling shares and bonds. Millions of people are
able and willing to invest in business through one of these
methods. So a successful limited company can easily obtain the
funds it needs for expansion.
6.
Economies of scale. The power of the limited company to raise

capital often leads to considerable growth in the scale of the
company operation. Large scale manufacturing and trading
usually yields significant economies, with a significant effect on
the reduction of productions cost.
Disadvantages of limited company

1.
Cost and difficulty of formation. The formation of a limited

company requires many legal documents and so, legal help and
advice are important, if not essential. There is more delay to
start a limited company than for a proprietorship or a
partnership. The formation process is very costly.
2.
Separation of ownership and control. For well-established

limited companies, especially public limited companies, the
directors of a limited company are elected by the shareholders
and the directors select the company officers. Individual
shareholders often have little influence on company policy of
operations.
3.
Slower decision making; Companies tend to be larger than

other forms of business enterprise and this, in itself, makes for
less rapid and flexible decision making. Major decisions require
ratification by the Board of Directors.
4.
Legal restriction on activities. A limited company has power

to carry out the objects set out in the Memorandum of
Association and also everything which is reasonably necessary
to enable it to carry out those objects. If an act is performed or
a transaction is carried out which, though legal in itself, is not
authorized by the objects clause in the memorandum, it is
beyond the power of (ultra vires) the company and void.
5.
Lack of personal interest. A limited company is run by the

directors and officers. They are not necessarily required to own

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shares in the companies they manage. This is not to say that
professional managers do poor job, but the motives for what
they do are different from those of the owner-managers.
D) FACTORS TO BF CONSIDERED IN CHOOSING THE FORM OF

BUSINESS OWNERSHIP
1.
Types of business (e.g. service, trade, or manufacturing) and
amount of capital re required initially and expansion
2.
Scope of operations and plan of internal organization - volume

of business and the size of the market area served.
3.
Degree of direct control and profit distribution desired by the
owners
4.
Degree of risk and owners' willingness to assume personal
liability for business
debts.
5.
Length of life desired for the business.
6.
The legal requirement and relative freedom from government
regulation.
7.
Comparative tax advantages under the different forms of
ownership.

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Comparison of different forms of business ownership
Sole
Proprietor
Partnership
Limited
Company
Formation
Easy
Easy
Difficult
Ownership
At least 2
Liability
unlimited
unlimited
limited
Share of profit
Complete
ownership
Partners
profit
Taxation
Personal tax
Personal tax
Corporate tax
Growth
potential
Restricted
Better
Beast
Capital
Less
More
Able to raise
large amount
Management
Owner
Partners
Specialized
management
Life
Limited
Limited
Perpetual
Business
activities
No restriction
No restriction
Restricted
Secrecy
Private
information
Private
information
disclose to the
public
E)
own Shared
by
shareholders
OTHER FORMS OF BUSINESS OWNERSHIP

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I)
Co-operative
A co-operative is a business owned and operated for the benefit

of its members.
Small producers of goods or consumers of goods and services

sometimes wish to band tether .to achieve the competitive
advantage of larger size in the marketplace.) Such groups may
form a co-operative in which production, marketing, or
purchasing facilities are jointly owned and are operated mainly
to provide services to members rather than to make a profit.
Characteristics of co-operative
1.
The owners are called members. They are also users of
the co-op service.
2.
Each member has one vote even though he may own
several shares.
3.
4.
are paid.
5.
Any profit made is usually distributed to members as

patronage dividends. This is paid in proportion to the
amount of goods a member has bought or sold.
Directors receive no salary; only managers and employees
Interest on their investment is paid to members.
Types of co-operatives
1.
Consumers' co-operatives - attempt to achieve lower

prices by buying in quantity and by eliminating the profit
in the final selling of goods.

15

2.
Producers' co-operatives - these involve people clubbing

together to produce gods or services, for example, a
growers' co-operative producing vegetables. Small
producers can get together to share their production
facilities. This enables them to gain the maximum benefit
from economies of scale and therefore to operate more
efficiently.
3.
Marketing co-operatives - they are set up to buy,

distribute, sell and promote various products. Distribution
is often a problem when there are large numbers of small
producers. A co-operative organization will help to advise
producers about production methods, collect produce,
store produce, grade and pack, promote and sell.]
Co-operative members can thus concentrate on production
without having to worrying about the storage, transport
and selling of their produces.
4.
Workers' co-operatives - are formed where each

employee bought shares in the firm and shared the profits.
Members will share responsibility for the success or
failure of the business. They work together and make
decisions together. Any profit will be shared among its
members
II)
Joint venture
Joint venture is an agreement between two or more businesses

for the joint production and/or sale of a product or service., The
partners in a joint venture may themselves be organized as sole
proprietorships, partnerships, or limited companies.
Each partner is expected to bring management expertise and/or

money to the venture.
It is a temporary partnership arrangement to carry out a single

business operation. After the venture is accomplished, it is
dissolved. `
Joint venture is a popular way to enter foreign markets. A

foreign company may find a partner in the country in which it
would like to conduct business and form a new business.
Advantages of joint-venture

16
1. less risk involved in terms of capital investment.

2. taking advantage of local expertise, business connection and
relation.
3. better access to sources of raw materials and market.
4. taking financial advantages, e.g. tax and allowance.

17

Disadvantages of joint venture
1.
conflict over the operation because of shared partnership..
2.
more logistics arrangement problem because it involves more

than one party in two countries.
3.
more co-ordination problem.
4.
restricted government policy and bureaucracy.
5.
problems of profit-sharing'
III) Franchising
A franchising is a licensing agreement that permits an individual

to own his or her business while benefiting from the know-how,
trademarks, and reputation of the established firm.
The individual owner ( the franchisee) pays the licensing

company ( the franchiser) an initial start-up fee, a royalty from
part of the business sales or profits, and sometimes an
additional royalty for a share in national advertising
programmes.
Types of franchise
1.
Product franchise - licensed to sell trademarked goods,

e.g. car lubricants, LP gas.
2. Business-format franchise - the right to open a business using

the franchiser name and format, e.g. 7-eleven, McDonald's.
3. Manufacturing franchise - licensed to produce and distribute
the products, using supplies purchased from the franchiser,
e.g. Swire bottling for Coca-Cola.

18
Duties of franchiser
1. Provide certain amount of management training and assistance
2. Furnish goods to the franchisees a price competitive with
market.
3. Advise the franchisee on location of business and design of the
premise.
4. Provide new employee training and retraining programmed for
existing staff.
5. Perform national advertising.
Duties of franchisee
l. Operate the business according to the rules and procedures set

by the franchiser.
2. Invest an agreed minimum amount in the business
3. Pay the franchiser a certain amount usually a royalty, being a
certain percentage of gross sales.
4. Buy supplies and other standard materials from the franchiser
or approved supplier.
Advantages of franchising
1.
Wide name recognition: a franchisee may have n instant

appeal of a national or regional re reputation It is
unnecessary to spend' years building up goodwill or
working out the kin s of business.
2.
Access to big business management skills: franchiser

may provide an established accounting system and cost
control In addition, there are also raining on marketing
and management.

19
3.
Lower costs: as all franchisees have to buy raw materials,

parts, or other materials from the franchiser the
franchiser may buy in bulk and re-sell them to franchisees
at a lower cost.) Also, there may have group insurance
benefits including business, health, and retirement
insurance that may be have at considerably lower cost
than if the business were by itself.
4.
Lower risk: the franchisee may start a business with a

well-known name. Once a franchising arrangement is
granted, there will have the advantage of - defined and
protected territory) All these will make the business have
a greater chance of success.)
5.
Financing : there is the possibility of franchise-sponsored

financing either by the franchiser itself or by pulling
together, a business plan that will more likely find
acceptance at a bank.
6.
Training and support: training courses will be provided

to the franchisee and the newly employed staff. An
individual may start his own business even though without
any prior business experience. A (franchiser will most
likely to assist the franchisee in solving business
problems.
Disadvantages of franchising
1. Considerable start-up expense: investment in a franchise
usual); requires a large amount of capital.) A fee for site
evaluation, site selection, or site preparation; and after the
premises are completed, a monthly lease payment on the
building and its equipment are also levied.
2. Monthly payments to the franchiser: In addition to the initial
fee, the franchiser will usually require a payment of (a
percentage of gross sales).This payment is known as royalty.

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3. Constraints on independence : (Equipment, supplies used,
inventory and services offered must be strictly approved b the
franchiser Also, there is (an involvement bathe franchiser in the
daily operation of the uric A franchisee must manage the
business strictly according to the elaborate operation manual

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Patrick Lo
4. No guarantee success: Many franchisees have seen their
investments disappear because of poor locations, rising costs, or
lack of continued franchiser commitment. The local franchisee is
vulnerable to changes in the national or even the international
reputation of the franchiser. In addition, there is the risk that
the chain itself could collapse. )
Discussion:
franchisers?
What are the advantages and disadvantages to

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Patrick Lo
F)
PUBLIC ENTERPRISE
Public ownership refers to organizations which are owned and

operated by the government.
Reasons o setting public enterprise

1.
To avoid wasteful duplication
2.
To set up a run services that might not be profitable.
3.
To gain the benefits of large-scale production It may be

more efficient to have one big firm producing a large
amount of output than .to have several smaller firms
producing smaller amounts.
4.
To protect employment. The government might take into

consideration that needs to create and keep jobs rather
than just considering financial profits.
5.
To control industries those are important to the country,

such as transport network, water supplies.
Disadvantages of public ownership

1.
Lack of competition often makes it difficult to assess their

efficiency. Greater possibility of waste, over-manning and
poor quality services.
2.
Government may delay decision-making or pursue policies

which are not in the best interests of the business.
3.
Any losses must be paid for out of taxation.

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Patrick Lo
G)
SETTING UP A BUSINESS
Discussion:
business?
What are the reasons or starting up a
Factors to be considered in starting business

1. Personal Background
2. Choice of business line
3. Analysis of general business conditions
Ways to set up a business

1. Invest in a franchise
2. Buy a business that already exists.'
3. Start a new business.
Buy a business that already exists

1. To check the existing business on the following aspects:
a) To determine the track record of such a firm.
b) To determine whether the owner is selling for the stated

reason
c) Carefully inspect the premises and inventory before making
an offer
d) Examine financial statements certified) by an accountant
e) Consult the firm bankers, suppliers, clients, etc.

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Patrick Lo
2.
3.
Advantage of buying into a business

a)
Reduction of uncertainty. If a business has been

successful in the past, it has a good chance of being
successful in the future. The purchaser will have the
distinct advantage of taking over an ongoing business that
has equipment, a physical location, a customer base,
employees, a reputation, and a number of supplies.
b)
Generate quick profit for investors. Because the

business is an ongoing entity, profits will begin to accrue
to the new owner as soon as the title is transferred. In
contrast, when an entrepreneur starts a new business, it
may take several years before the firm actually makes any
profits.
c)
The possession of necessary licenses and permits.

For some businesses, e.g. restaurant, it is necessary to
apply for many licenses in order to operate the business in
Hong Kong. However, it takes a long time to apply and
receive the required licenses from various government
departments. An advantage of buying into a business is
the saving in time in getting the licenses for operating
business.
Disadvantages of buying into a business

a)
b)
c)
Changes are sometimes difficult to make without risking

the loss of goodwill from established customers.
Inherit the previous owner creditors.
The firm employees- may not met your expectations, or
you may not meet theirs.
d)
The previous owner may re-open nearly and lure
customers from. you. The
customers of a small business are often more loyal to the
owner than to the
business. When the owner goes, all the customers might
go as well.
e)
The facilities may not be in as good working condition as
you expected.

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Patrick Lo
Start a new business

1.
Advantages
a)
research
The Best possible location can be selected, based on
b)
Physical facilities are modeled to the exact needs of
the business
2.
c)
Customer (goodwill can be developed through one

own policies and relationship.
d)
Staff can be trained or selected according to the

needs of the new business
Disadvantages
a)
A higher risk in starting a new business than in

buying an established one, because o lacking
assured customers
b)
The demands of capital land time are greater for

building customer goodwill.
c)
Credit will take time to establish. In the meantime;

many supplier transactions will have to be paid for
in cash.
d)
Capital loans are often more difficult to obtain.

Banks in general are not willing to grant credit to
new firms.
e)
It is more difficult to get organized, established

procedures, and develop workable policies
f)
Starting costs are high, because of time, license

procedures, researching, looking for location, etc.

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Patrick Lo
Steps of starting a business

1. Conducting a situation assessment
In a situation assessment you take an in-depth look at both
yourself and the business environment.
2. Developing an overall business plan
A business plan is a document that spells out in detail a
firm objective, form of ownership, and actions needed
achieve the objectives .
- Contents of a business plan
Industry analysis
studies the overall business
environment
analyzes the industry the firm is
competing in
focuses on industry trend and ,profit
potential
General information determines the objectives of the
business
selects the legal form of ownership
decides the products
and/or
services
studies and chooses the location
Organizational plan decides the organizational structure
identifies the responsibilities and
authorities of each job
prepares the organizational chart
Production plan
determines the intended capacity

decides the layout
prepares a statement of the
production
facilities that are required
Marketing plan
identifies the target market

analyzes of market needs
gathers marketing information on
the
competition, market share etc.
formulate product, pricing, dace and
promotion strategies
Human
plan
resources indicates the types and number of

employees
establishes the other personnel

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Patrick Lo
policies
Financial plan

estimates the startup capital

required
analyzes the fixed costs and variable
costs
conducts breakeven analysis
budgets the cash flow situation
establishes the accountings system
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Patrick Lo
3.
Projecting financing needs

- Projecting financing need requires
a)
b)
c)
d)
4.
Setting up a capital budget

preparing projected income statements
preparing month-by-month projected cash flow statements
preparing a projected balanced sheet
Securing the needed resources and permits

-
A new firm secures the needed capital through equity or debt

financing. Equity capital is funds provided by the owner. Debt
funds are borrowed funds. Venture capitalists are individuals
and businesses willing to provide money to entrepreneurs
who have new products or new-product ideas that are as yet
unproved on the market but have a good chance of becoming
successful.
5.
Establishing internal control procedures

Internal controls include an accounting system and a
security system.
6.
Starting to serve customers

-
Your firm will not be profitable if its costs are greater than its
sales revenues. Keeping track of costs and measuring
progress against the firm objectives is called control.

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Patrick Lo
Problems of setting up a business
Internal Problems

External Problems
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Patrick Lo
H)
SMALL BUSINESS
Small business is defined as one which is {independently owned

and operated and which is not dominant in its field of
operation).
A small business cannot be part of another
business: operators must be their own bosses, free to run their
businesses as they please.
Characteristics of small business
1. Independent ownership. The boss, and possibly a few other

individuals, own the business.
2. Independent operation and management. Since the managers of
small businesses are the owners they are in a position to make
their own decisions. As small in operation scale, the operator is
both investor and employer. This gives him or her complete
freedom of action.
3. Limited capital. The amount capital required is relatively small
compared with that required by most corporations. It is supplied by
one person or at most by a few people.
4. Small employee size. The employee size is usual less than 50)
5. Local operations. Except for marketing, most of the firm's
operations are localized in one community.
6. Simple internal structures, short-term oriented, profit-oriented,
willingness to take risks.
Contributions of small business
1. About 96% of manufacturing businesses in Hong Kong are in the
form of small business and they contribute much to the gross
domestic product (GDP).
2. Small businesses provide job opportunities. In addition, small
firms are often more willing than large firms to adjust to workers'
needs and so many younger, older and female workers may have
job offers.
3. Small firm introduce many new products. They are ore flexible and
are willing to risk trying new technologies than are many larger
31

Patrick Lo
firms. Big business means big bureaucracy, and big bureaucracy
means that decisions are made slowly. In addition, research
departments in big businesses trend to focus on improving existing
products rather than creating new ones.
4. Small firms are complementary to larger business. They support
large businesses through the provision of goods and services. They
are important suppliers to urge firms. Most big businesses realize
that there are a great many important activities that small
companies can do more efficiently and effectively for them than
they could possible do for themselves.
5. Small businesses can help to keep the economic system alive. A
person, can, with hard working and determination, become his or
her boss. This pushes people to work harder and the whole
economy will be better off.
Advantages of small business

1. Flexibility in Management
Small business is more flexible to respond to the complex
changing environment. The structure is not so formalized and
thus more easily adaptable to necessary changes. The decision
making process is also shorter, enabling the company to act
quickly to seize market opportunities.
2.
Innovation and initiative

As the decision making process within &' small business is
highly centralized, this allows the owner-manager who have
the innate ability to discover ideas to insight on a unique or
unusual way of doing things. Besides, the owner-manager is
usually the only one in the business who is going to benefit
from the profit earned and to take up the liability of the loss
incurred. As a result, he will have stronger initiative to word
3. Profitable small opportunities are plentiful

Profitable small opportunities are plentiful in the business
environment. Small companies react to smaller opportunities
that would have a definite effect on its profitability but would
probably have been too small for a large company
4. Closer contact with the customers
The small business provides an environment on which
management is close to its customers. This(closeness with the
customers, makes it possible to better serve the specific c
32

Patrick Lo
needs of the customers, to respond to their suggestions and
complaints and to provide a personal friendly atmosphere
5. Low overhead
Many large companies are burdened with high overheads) such
as the salary for the staff specialists and often these costs are
passed on in form of higher prices to the customers in some
cases this opens attractive opportunities -for the small business
that has been able to avoid these excessive overheads.
6. Management can have a more direct profit impact
In small companies, the effect of management actions on the
overall performance of the company is more direct than in a
large company. This (enables management to l take more
effective action to improve the company performance in the
market place .
7. Personal contact with employees
The industrial relation in a small business is usually better.
Many employees value the personal relationship with the
manager, brought about by face-to-face communication
Disadvantages of small business
1.
Inadequate management ability

Small business management vulnerability to failure is often
attributed to lack of all round ability and experience in all the
facets of businesses as planning organizing, marketing,
accounting and finance.)
2.
Difficulties in access to capital

Small businesses have very limited access to bank or other
institutional loan and this can hamper their growth and
development. They usually do not have secured property
demanded as collateral for loans financial institutions.
Furthermore, banks often also demand audited accounts of
business to evaluate the company track record. Small business
rarely keeps good systematic record.
3.
High labor turnover.

There is often a high turnover of employees in small business
Reasons being low wages, lack of future prospects, lack of social
benefits and the insecurity of small business. Thus often

33

Patrick Lo
employees acquire and learn their skills from the small
companies and then move on to more established companies.
4.
Poor competitive position

Small business generally have limited information about the
environmental conditions about the suppliers government
regulations, changing market trends or new technologies This
often leaves them at disadvantage a competitive position the
market place. Besides, its small operation scale restricts it from
enjoying the economies of scale making the small business even
weaker in competing with others.
Causes of small business failure
1.
Economic factors
It was found that the failures of many small businesses were a
result of economic factors. Most important among these factors
are industry weakness, poor profitability, and poor growth
prospects.
The small business owner is well advised to keep abreast of
events taking place in the economy as well as in the firm's
industry. This is particularly important in cyclical industries.
2.
Lack of management skills

Most small business owners must rely on their own managerial
judgment, because they cannot afford to hire management
specialists.
A good way to overcome some management-related problems is
to acquire adequate experience before jumping into a business
venture. For example, if a person is going to open a restaurant,
it is advisable to work in one for at least a couple of years.
3.
Difficulty in keeping good people

34

Patrick Lo
Small businesses lose talent because of low salaries. In addition,
many people leave small businesses because of a lack of
opportunities for advancement.
In such a case, about all the owner can do is to offer different
kinds of challenges to valuable employees and hope that they
will stay with the firm longer than they might otherwise.
4.
Aggressive competitors
Successful businesses attract competitors. If the new market
has growth potential, other businesses - large and small - will
soon enter. Competition in the market becomes intense as the
original entrepreneur tries to think up new ways to promote and
sell the product or service.
The small business entrepreneur must try to stay one step
ahead of the competition to remain successful.
5.
Lack of economies of scale

As more units of a product are produced, the average cost to
produce each unit decreases. This economic principle is called
economies of scale. Small businesses typically produce so few
units that it is difficult to achieve economies of scale.
There are two defenses for the small business. First, it must not
assume that just because it is small, it cannot be efficient. Small
businesses that take advantage of the latest technology may be
able to be more efficient than they ever realized. Second, small
businesses that offer specialized services and products
frequently find that there is a market that is willing to pay for
their high-quality services and products.
6.
Poor financing
Small businesses are hard to obtain long -term financing. Banks
rarely lend money to a small business for more that a year or
two, because loans to small businesses are risky. When funds
are made available, they frequently carry a high interest rate, to
compensate the lender for the greater risk.

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Patrick Lo
One sure source of additional funds for the successful firms is
profit. A small business may grow by reinvesting its profits in
the business. A second approach is to find an outside investor to
buy part of the business.
1.
Whether Hong Kong government should support small business

Arguments to support
Support the small business will promote more free competition
Help the small business means help to create jobs and enhance
the economic performance as a whole since small business
always plays an important economic role.
Provide assistance to small business is a long-term investment

for Hong Kong as it
would help the technological development in
the future.
2.
Arguments not to support
It is a waste of resource if those small business firms fail to

survive even with the government support or subsidies.
Government might only protect the inefficient competitors if
they were financed
with government aid.
Government might have to increase the administrative load
when soliciting the small
business firms to be qualified.
-
I)
No specific forms of support are called to be effective.
BUSINESS GROWTH
Many small businesses have the long-term objective of growing

in size. A firm that
grows quickly will find it easier to attract
investors and will be able to produce on a
large-scale.
Discussion: What are the advantages of being a big company?

36

Patrick Lo
J)
Methods of growth
I.
Internal growth
A company can grow to a greater size by successfully
producing profits and reinvesting them in expansion to
produce even more profits. Another method of internal
growth is tissue more shares or even by borrowing.)
2.
Merger
When two or more companies join together so that only
one company remain they said to undergo a merger.
3.
Take-over
When one firm, not necessarily with the consent of the
other, controlling interest. This is possible because shares
can be freely bought and sold on the stock market.
MULTI-NATIONAL CORPORATION
The multi-national corporation is a business with facilities in one

or more countries
other than its own that operate on a global
basis by making management decision regarding profits, facilities,
sales and services in many parts of the world
Features of MNC
1.
A multi-national corporation has significant operation in

more than one count
2.
It runs operations without much regard for national

boundaries in line with a central strategy and core of
values set at the centre.
3.
An MNC may earn more of its profits and own more assets
outside its home country than inside it.
4.
It has to cope with very different environments, stages of

economic development, legal, and taxation systems. It also
has to cope with a variety of time zones and geographic
distances.

37

Patrick Lo
5.
It has to manage a work force of many different
nationalities and cultures.
6.
It often has to bear high political risks. .
Discussion:
MNC?
What are the contributions to host countries and criticism on
Contributions
Criticisms
THE END

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HKAL BUSINESS STUDIES

FORMS OF BUSINESS OWNERSHIP

The private sector or private enterprise is the term used to

Public enterprise refers to the public-sector business

CHARACTERISTICS OF PRIVATE ENTERPRISE SYSTEM

Individual freedom extends further. Under private enterprise

Section 2 Forms of Business Ownership

HKAL BUSINESS STUDIES

Section 2 Forms of Business Ownership

HKAL BUSINESS STUDIES

COMMON FORMS OF BUSINESS OWNERSHIP

Sole Trader (Sole. Proprietorship)

The sole proprietorship is a form of business that is owned and

Characteristics of sole trader:

Ownership: The business is owned by a single individual.

Management: Although a sole trader may employ some

Finance: The proprietor must accumulate enough capital

Section 2 Forms of Business Ownership

HKAL BUSINESS STUDIES

Unlimited liability: A proprietor is personally responsible

Small size: Business owned and operated by a sole trader

Formation of sole proprietorship in Hong Kong

The legal procedure for setting up a sole proprietorship is

Advantages of sole proprietor

Ease of formation and dissolution, a proprietorship is easy to

Flexible management. Promptness in executing policies, in

Sole claim on profits - a stimulant to personal incentive. The

Favorable credit standing. Since the owner is personally

Section 2 Forms of Business Ownership

HKAL BUSINESS STUDIES

Preferential treatment by government.

Disadvantages of sole proprietorship

Limited size. The size of a sole proprietorship is limited by the

Unlimited liability for debts. The claims of creditors against

Lack of continuity Since the business and the owner are

Limited management ability. Every business has many basic

Section 2 Forms of Business Ownership

HKAL BUSINESS STUDIES

Partnership is defined as an association of two or more persons

It is a voluntary pooling of resources of two or more people into

There may be between 2 to 20 partners, except in a

Partners may contribute property, skill or labor and is

Regardless of the amount of investment, each partner

Any agreements in relations to ordinary course of

It is not a legal entity.

All partners have equal right in the management of the

Partners usually enter into an agreement, or deed,

Basic to all general partnerships is an "agreement of

Section 2 Forms of Business Ownership

HKAL BUSINESS STUDIES

For general partnership, partners need to register with

Multiple sources o f capital.

Diversification of management The distribution of duties

Section 2 Forms of Business Ownership

HKAL BUSINESS STUDIES

Possibilities of growth and expansion. Diversification in

Improved credit rating. As each general partner has unlimited

Preferential treatment by government.

Joint and Unlimited liability. Under normal circumstances,

Conflict in authority and control. With authority spread

Lack of continuity. The death of a partner dissolves the

Frozen investment. It may be most difficult to withdraw your

Section 2 Forms of Business Ownership