Hello, welcome back to another business A-level lesson. I'm gonna look at 3.12 now. So as you can see on the spec check in front of you, this is what I'm gonna go through. We're gonna look at the different business forms, we're gonna look at shareholders, we're gonna look at share price, and that's gonna be the main part of this.
If you did use a CEO, this would have been called business ownership, and also you're likely to have done partnerships, depending on your board. We don't do partnerships in A-level or AQA. So that's one less thing for you to know, but obviously we cover the other ones in a lot more detail than you would have done at GCSE. So that's just to make you aware. So we'll get straight into it then.
So business forms is what it's called, we're gonna look at today. There's a few different key terms that you need to know. So the first one's capital. Capital is just another way of saying money.
And we use it for when we're talking about a business starting up or developing a business, we use capital to fund that. Unlimited and limited liability I'm going to come onto in a minute when I look at the different types of business forms. But basically unlimited liability is when you are fully responsible for all the debts of the business.
And limited liability is when you're basically not, you are only responsible for the money that you invest or you're only going to potentially lose the money that you invest and you're protected a bit further. Dividends is money that's paid to shareholders from the profits of a limited company. So obviously if a business is not making any money, you're unlikely to be getting any dividends out of it.
So the first business form you need to know is a sole trader. This is a business that's owned by one person. Bit of a misconception here is that you can still employ people, but it's just you've got one owner in the business.
but you can still if you've got a skills gap skills shortage you can still hire people to feel that that's absolutely fine um pros of being a sole trader then easy and cheap to set up you've got complete control over the business you get to keep all of the profits and your financial information is not shared um negatives then unlimited liabilities this is the first time this has come into it so for you if you're setting up as a sole trader you have unlimited liability and that means you're fully liable for the debts of the business okay so if you Set up a business and something goes really badly wrong You are fully liable for the debts within the business and you need to pay those back So you put your personal assets at risk if you've got a house if you've got a car You you're potentially putting them at risk hours of work may be long and That can put some pressure on you and you might become ill from it and things like that And and again, you can still hire people to share some of the workload but It can be quite difficult when you're a sole trader you're the only person running the business Continuity if the sole trader dies and the business will cease it will stop Now some people will say okay But what happens if just before they die they sign the business over to a friend or someone else they sell the business Absolutely that can happen Obviously if there's nothing in place and that the person was to die who's running the business that the business will stop But it could be it could be sold the business it could be signed over to somebody else absolutely but obviously that needs to happen before they die um shortage of capital then um again we've only got one person putting the money into the business so it could be a shortage depending on how well off that person is and there could be a skill shortage because we've only got one person running the business and we've only got their skills uh private limited company then so you'll notice that we've got our limited liability here is the first advantage so we went from having unlimited liabilities a disadvantage of being a sole trader and for the next two uh we've got limited liability as being a positive uh basically limited liability means you and the business are treated as separate entities and you can only lose what you've invested um so that is a positive when you become a private limited company that is a big positive so a private limited company is a business owned by at least two shareholders you'll notice the terminology of the owners has changed here we're not talking about uh owners we're talking about shareholders okay um so for private limited companies we're talking about the people that own and run the business as shareholders Continuity then, this business can continue if one of the shareholders was to pass away. They can raise more money because they can now sell shares and you've got control over the share sale. In a lot of books they'll talk about private limited companies as mainly selling to friends and family. It's not always the case. A lot of the businesses that go on, for example, Dragon's Den, they're private limited companies and they're obviously the dragons are not.
friends or family of them. So it doesn't have to be necessarily friends and family, but some books will say that. Negatives, some financial information is available. I know it's called a private limited company, but that doesn't mean that their financial information is fully private.
Some information is still available. Admin, it's a bit more difficult to set up as a private limited company. So there's a bit more admin paperwork and things like that needs to be completed. You need to register.
with the registrar of companies. Takes a bit more time, costs a bit more money than being a sole trader. The sale of shares is restricted and you will need to pay dividends to your shareholders as a reward, certainly if you want them to stay with you.
The next one we're gonna look at is a public limited company. That's abbreviated as PLC. The abbreviation for private limited company is LTD. So this is a business that's owned by shareholders.
The difference is here though, because obviously the last one was owned by shareholders, is the shares for the a public limited company are bought and sold on the stock exchange pros of this you can raise a lot of capital a lot of money it's easier to borrow money because you're seen as being a big large organization so maybe you're more trustworthy you benefit from limited liability still so you and the business are seen as separate entities disadvantages of being a public limited company possibility of a takeover costs money so you've got to have at least 50 000 pounds worth of shares to set up as a plc Big businesses can be inefficient as well, and financial information is fully available for people to look at, and other businesses also to look at. This is a nice diagram that just shows the difference between unlimited and limited liability. So a sole trader has unlimited liability, as I mentioned before. They're seen as being the same entity.
So if the business loses money, the sole trader needs to pay that back, or they will be liable for those debts to the business. whereas a private and public limited company they have limited liability and therefore that means the shareholders and the business are seen as separate entities so you're only liable for what you've invested okay if you buy one share in McDonald's for 200 pounds you know the max you could lose is 200 pounds okay you're not fully liable for all the debts of McDonald's just because you bought one share in McDonald's because it's a public limited company two more words to get your head around then unincorporated and incorporated sole traders are unincorporated because they have not yet become incorporated um basically when you're unincorporated the owner of the business the owner in the business the same thing there's no legal difference but when you go through the process of incorporation there's that separation between the business and the shareholders and they're seen as being separate entities so you need to think about suitability then which one is right for for you or which one's right for if the exam case study So a lot of businesses will start as a sole trader or a private limited company, LTD, private limited company. That's because obviously sole trade is the easiest one to set up as, but private limited company gives you a bit of better protection if you've got sort of a lot of assets or maybe you own a house or something like that and you want to protect that. How much money is required as well, that might impact on what business form you choose. If the person has a lot of personal wealth, you probably want to be a private or a public limited company.
Because you want to protect that personal wealth just in case the business doesn't go well Do you have enough skills if not again? Maybe sole trader wouldn't be suitable because it's just going to be you running the business for established businesses They might change once they've grown so they might go from sole trader to private to public limited company Growth requires capital. So again becoming private or public limited company enables you to generate money from selling shares Biggest businesses will almost always be PLC's public limited companies And there's also a control issue obviously as you move away from being a sole trader You will start potentially losing a bit more control, especially when you become a public limited company Now there is another set of organizations called public sector organizations You need to put everything that I've said already already in this presentation to the side because public sector organizations is nothing to do with public limited companies So public sector organizations of organizations are owned run funded by the government so the best example is the nhs okay they are funded by the government and they are a public sector organization they are not a public limited company um and it's sure i show you it nicely here on this map okay so public sector separate on the left hand side these are the businesses that are owned and run by the government and on the right hand side we have private sector businesses your three business forms they are set up to make money basically, that's what they're set up to do. And you've got two different sections of that. You've got unincorporated businesses, which is your sole trader, and then you've got incorporated, which are your two limited companies.
So some examples then, McDonald's is a public limited company that operates in the private sector because they want to make money. They have limited liability because it's in the middle of their name, public limited company, and they've gone through the process of incorporation, so they're an incorporated company. A sort of local hairdresser, they're likely to be a sole trader. So you've got one person running the business.
They operate still in the private sector because they want to make money. They have unlimited liabilities of the business and the person that owns it. They are seen as being the same thing and therefore they're fully liable for the debts of the business.
And they're unincorporated because they've not gone through. the method or sorry they're not going through the process of becoming incorporated now there are even more businesses that you need to be aware of so we've got not-for-profit businesses these are businesses that they want to trade and generate money but then they want to use that money to maybe support a local aim a social aim something like that support the local community charities are slightly different again they want to raise money to help a certain need then there's three other types you need to be aware of that all types of mutuals and if you think about the word mutual it's to benefit maybe more than just the shareholders from a financial point of view so consumer cooperative is a business that's run for the consumers for the customers a worker cooperative is a business that's run for the workers for the employees a producer cooperative is a business that's run to support the producers so that's basically the other three types we're going to move on now to shares we're going to look at that um so an agm annual general meeting is a meeting where the shareholders will get together and they can sort of quiz the board about any sort of problems or queries they might have you might have a discussion here about things like what's been happening to the share price or what's going to be the dividend policy and things like that and dividend cover is pretty much exactly that it's you know how well are you or how yeah how well are you receiving dividends based on how much profit the business is making if there's a poor return then you might think about selling your shares in that particular business external constraints anything outside the business control that could impact on the business so there's two ways in which shareholders are rewarded first one's dividends and the second one is capital growth or capital gains dividends is just a reward for having shares in the business now the business will likely need to be profitable in order for the shareholders to get a dividend if the business isn't profitable it'll be difficult to receive a dividend capital growth or capital gains is basically when share price increases in value so if you buy one share of mcdonald's for 200 pounds and they sell it three months later for 210 pounds you've had a capital gain of 10 pounds so we want the value of shares to be increasing if we're an investor or even the business. So what is a share then?
It's just a small percentage of the business that's all it basically is so if you own one share of McDonald's you might own 0.0000001% of McDonald's. Most shares are sort of ordinary shares and you'll get equal voting rights depending on how many shares you own so obviously if you own one share of McDonald's you're unlikely to get any when you're not unlike you won't get any say in any of these sort of big decisions that come up McDonald's and you're also unlikely to qualify for a dividend you'll need to hold more shares so here's an example of shares and shareholding so for example Jim owns 11,000 shares in this business so you do 11,000 divided by 20,000 which is a total amount of shares and you can see that he's the highest shareholder he has a shareholding of 55% so he's like to have the most control in this business. So we've spoke about this a little bit but there's a few things that impact on share price, supply and demand. So how many shares do people want? Are people buying lots of shares in it or and that might lead to share price rising or if people are selling lots of shares and there's not a lot of interest in buying shares in a business that could lead to share price falling.
If we have I mean that's the second point and the third point really if we see a falling share price that could be there's an excess supply i.e. more people are selling shares than actually buying them um so share price of a private versus public company then so share price of a private company um initially set when the shareholders um subscribe for the shares uh and basically what's going on is you know when they're actually selling those shares they're determining a price for them whereas for a share price for a public limited company that's going to be generated in real time because obviously people are buying and selling those shares and therefore you'll get a price that will change rapidly and here's an example of the share price of Apple since Quite a while ago now so we can look at it from 2019 Even in 2019 you're talking about a share price of about just under $50 a share It's now sitting at about one hundred thirty one dollars a share So even within the last three or so years, we've seen quite a large growth in Apple share price You Market cap, market capitalisation then, there's a basic formula for this. It is share price times by number of outstanding shares. I don't really like that formula.
You're better off just remembering the formula share price times by all of the shares. because that's really what it's asking you to do. So in this situation here, we've got a share price of four pounds 50. There's 10,000 shares that are gonna be issued, 4,000 shares that will be held.
So you do four pound 50 times by 14,000 and that gives you 63,000. That's the market cap for this business. And it gives you an idea of the valuation of this business. There's three questions here. So what you might wanna do is just pause the video and then have a go at the three questions.
and then check your answers in just a sec okay so answers are there for you now you can just tick them off if you've got them correct and the workings are there if you didn't so we've already talked about this a little bit but factors that influence a PLC share price so it's like to be based around performance is the business doing well or not it could be the dividend policy relationship with the shareholders management reputation you know do they have a good reputation of driving the business and businesses doing well and there's also lots of things outside of a business's control so how well's the economy doing what's the general market sentiment whether the company is a takeover target all of these sort of things are likely to have an impact on the share price of a business or a plc share price and profit warnings then so you might if things are not going well for your business you might want to warn potential shareholders that they're going to be receiving less or no dividends just to sort of warn them so they don't sell their shares really quickly you might accompany that maybe with a plan for the future and how you're going to improve increase share prices or how you're going to increase them blends in the future. So when a business is looking at funding certain expansions they might use either share capital or debt to do that. So they might sell some more shares or they might borrow money and there's a few points here you can read through them in your own time but they're just going to a bit more depth about it.
But they're kind of two, there's more than just two options but there's two options in terms of here. in that you could either sell more shares within your business or you could generate some debt by borrowing money and both of them have pros and cons um so doing a share issue then selling more shares has pros and cons um it can raise substantial money it can broaden your base of shareholders which can improve knowledge um and you've got equity rather than debt so maybe it's a little bit less risky however it can't be costly because you're going to have to do things like dividends to shareholders and things like that could be time consuming and the current shareholders their holdings will be diluted, okay, because they're going to own less of the business because you've got new shareholders coming in. There's two main methods of issuing shares for a public company.
You could do a flotation, which is when you issue your shares on stock exchange for the first time, or you could do a rights issue, which is when you're established, you can do a fresh issue of new shares to existing shareholders. That's everything for this section. Thank you very much.