3.1.2 Forms of business and stakeholders

Topic 4: Different forms of business

Key ideas

Form	Ownership/control	Liability	Finance	Profits
Sole trader	One owner with full control	Unlimited	Owner's savings, loans; limited	All profit kept by the owner
Private limited company (Ltd)	Shareholders (often family); shares are not sold publicly and transfers are restricted	Limited	Share capital from private investors, loans	Dividends to shareholders; retained profit
Public limited company (plc)	Shareholders; shares can be traded on a stock exchange; ownership separated from control (directors)	Limited	Can raise large sums via share issues	Dividends; retained profit
Co-operative	Members (one member, one vote): worker (owned by employees), consumer (owned by customers, e.g. the Co-op Group), producer (e.g. farmers' co-ops)	Usually limited	Members' shares, loans	Shared among members or reinvested
Social enterprise	A business with social or environmental objectives, reinvesting most profits towards its mission (e.g. The Big Issue, founded 1991)	Depends on legal form (e.g. a CIC is limited)	Grants, social investment, trading income	Mainly reinvested in the mission

• Issues to consider when comparing forms of business:
  • Control: e.g. the risk of losing control in a plc; possible takeover.
  • Objectives: e.g. plc shareholders want dividends and share-price growth; social enterprises want social impact.
  • Sources of finance.
  • Distribution of profits.
  • Unlimited versus limited liability.
    • Unlimited liability: the owner is personally responsible for all business debts, so personal assets are at risk.
    • Limited liability: shareholders can lose only what they invested. The company is a separate legal entity.
• Reasons to buy shares:
  • dividends (income);
  • capital gain (a rising share price);
  • voting rights and influence;
  • perks.
• Influences on share price:
  • company performance and profit forecasts;
  • dividends;
  • market sentiment and confidence;
  • interest rates;
  • economic conditions;
  • takeover speculation;
  • news about management and products.
• Significance of share-price changes:
  • A falling price lowers market capitalisation and makes the firm vulnerable to takeover.
  • It makes raising new share capital harder.
  • It signals loss of confidence.
  • It affects directors' share-based pay.
  • It does not directly change the firm's cash.

Worked example (market capitalisation, dividends and yield)

A plc has 50 million shares priced at £2.40 and pays total dividends of £6 million.

• Market capitalisation = 50m × £2.40 = £120m.
• Dividend per share = £6m ÷ 50m = 12p.
• Dividend yield = 12p ÷ 240p × 100 = 5%.
• Interpretation: a 5% yield compares favourably with a savings rate of, say, 4%. However, investors also consider risk and expected capital growth. If the share price falls to £2.00 while the dividend stays the same, the yield rises to 12 ÷ 200 × 100 = 6%.

Glossary

Term	Definition
Limited liability	Owners' liability for debts is limited to the amount invested.
Unlimited liability	Owners are personally liable for all business debts.
Shareholder	An owner of shares in a company.
Dividend	A share of profits paid to shareholders.
Market capitalisation	The total market value of a company's shares.
Dividend yield	The dividend per share as a percentage of the share price.
Co-operative	A business owned and controlled by its members.
Social enterprise	A business trading for social or environmental purposes, reinvesting surpluses.
Separation of ownership and control	In plcs, shareholders own the company but directors and managers run it.

Self-test

Q1: A firm has 20m shares at 150p and pays a dividend of 6p per share. Calculate the market capitalisation and dividend yield. A: Market capitalisation = 20m × £1.50 = £30m. Dividend yield = 6 ÷ 150 × 100 = 4%.

Q2: Assess whether a growing private limited company should become a plc. (Outline) A: For: it can raise large sums of share capital to fund expansion, and it gains status and liquidity for shareholders. Against: the costs of flotation and disclosure, the risk of losing control and of takeover, and pressure for short-term results and dividends. Judgement: it depends on how much finance is needed and on whether the founders value control.

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Topic 5: Stakeholders

Key ideas

• Stakeholders are individuals or groups with an interest in, or affected by, a business.
  • Internal stakeholders: employees, owners/shareholders.
  • External stakeholders:
    • customers;
    • suppliers;
    • other creditors (e.g. banks);
    • the community;
    • government.
• How business activity affects stakeholders:
  • Expansion creates jobs (employees, community) but may increase traffic or pollution (community).
  • Cost-cutting raises profit (shareholders) but may mean redundancies (employees) or squeezed suppliers.
• Conflicts and overlaps of interest:
  • Conflict: shareholders want higher dividends, while employees want higher wages.
  • Overlap: all stakeholders gain from long-term success.
• Ethical responsibilities to stakeholders:
  • fair pay and safe conditions;
  • honest marketing;
  • paying suppliers on time;
  • minimising environmental harm;
  • paying taxes.
• Stakeholder mapping (Mendelow's power–interest grid) is a "sophisticated concept" you can use in 15-markers:

	Low interest	High interest
High power	Keep satisfied	Manage closely (key players)
Low power	Monitor	Keep informed

Glossary

Term	Definition
Stakeholder	Anyone with an interest in, or affected by, a business's activities.
Shareholder	A stakeholder who owns part of a company.
Creditor	Someone owed money by the business (e.g. a supplier or bank).
Stakeholder mapping	Classifying stakeholders by power and interest to decide how to manage them.

Self-test

Q1: Give one conflict between two stakeholder groups. A: Shareholders may want costs cut to raise profits and dividends, while employees want higher wages and job security.

Q2: Using stakeholder mapping, how should a business manage a major bank lender? A: A major lender has high power (it can withdraw finance) and usually high interest, so the business should manage it closely: consult it and keep it regularly informed.

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