A sole proprietorship is a business owned (and usually operated) by one person who is responsible for all of the firms debts.
Features of sole proprietorship
- One main business – owner also acts as manager.
- Owner makes all decisions.
- Owner contributes all the capital.
Advantages of sole proprietorship
- Simple to form – Little legal barriers – Simple procedures.
- Low start-up costs – Little capital required. This is good for start-ups who might have problems securing loans from banks.
- Retention of all profit – owner keeps all profit.
- Complete control of business – Decisions can be made quickly as there is no need to consult partners.
Disadvantages of sole proprietorship
- Unlimited liability: Owner is legally liable for all debts incurred by the business.
- Lack of continuity – A sole proprietorship legally dissolves when the owner dies.
- Reliance on one person for all resources – both finance and human resources.
- Limited credit availability: Banks prefer to lend money to large corporations with stronger financial background.
General partnership is a business with two or more owners who share in the operation of the firm and in financial responsibility for the firm’s debts.
Limited partnership is a type of partnership that allows for two types of partners: limited partners and active partners (general partners).
General partners: Responsible for running the business and are legally liable of all of its debts. All partnerships are required by the Partnership Ordinance to have at least one general partner, mostly for liability purpose.
Limited partners: Contribute only money or capital to a partnership. Their liability is only limited to the amount of their investment in partnership. They share in the profit but they do not take part in management.
Features of partnership
At least 2 or more partners but not more than 20 partners.
All general partners are expected to play an active role in management.
Partners write and sign partnership agreement – Specifies the role of each partner in the operation of the business.
Advantages of partnership
Larger money pool: banks and other lending institutions prefer to make loans to enterprises that are not dependent on a single individual.
Large talent pool: “Two heads are better than one”.
Ease of formation: It is simple to organize a partnership with few legal requirements.
Disadvantages of partnership
Unlimited liability: each general partner is legally liable for all of the business debts.
Possibility of conflicts: Arguments between partners could be disastrous to the business.
Lack of continuity: When one partner dies or pulls out, a partnership may dissolve legally, even if the other partners agree to stay. If they wish, the surviving partners can quickly form a new partnership to retain the business of the old firm.
Ownership transfer difficult: No partner may sell out without the other partners’ consent.
A business considered by the Companies Ordinance to be a legal entity separate from its owners and with many of the legal rights and privileges of a person; a form of business organization in which owners liability is limited to their investment in the firm.
Features of corporations
As a legal entity, a corporation can own assets, enter into contracts, sue and be sued.
Corporation has many owners – shareholders.
Can be privately held (private companies) or publicly held (listed companies).
Private companies: a business whose stock or share is held by a small group of individuals and is not usually available for sale to the general public.
Listed companies: a business whose stock is widely held and available of sale to the general public through the stock exchange market.
Advantages of corporations
Limited liability: Liability of investors is limited to their personal investments in the company.
Continuity: Corporation has legal life of its founder, continuing after original owners are gone.
Professional management: the executive officers of a corporation are chosen on the basis of their managerial and decision-making skills.
Easy access to source of finance. Bankers are more likely to lend money to large corporations.
Disadvantages of corporation
Cost and complexity of incorporation: Formation procedures more complicated than the other two types; advice from lawyer and accountant often required.
Public disclosure: Government and the Stock Exchange of Hong Kong requires all listed corporations disclose a broad set of financial data to protect investors from misinterpretations of facts. For the firm this may be disadvantageous as it alerts competitors to the firm’s financial weaknesses.
IV. Small Business
SME (Small & Medium Enterprises) in Hong Kong
Enterprises that engage less than 100 persons in the manufacturing sector and less than 50 persons in the other sectors are classified as SME
Organizations that help SME:
Trade Development Council
Hong Kong Productivity Council
Hong Kong Chamber of Small & Medium Business
Importance of small business
Create new jobs.
Responsible for many investments and innovations.
Act as supplier or seller of goods and services for larger business.
Popular forms of small business
Advantages of small business
You are the boss that enjoy taking risks and making decisions.
Great potential rewards.
Innovative products and services.
Disadvantages of small business
Limitation of capital.
High risk of failure.
Success and Failure of Small Business
Reasons for success
Hard working and dedication.
Demand for the products or services being provided.
Reasons for failure
Lack of economies of scale.
Managerial incompetence or inexperience.
Weak control system.
Lack of capital.
Starting and Operating the Small Business
Starting the small business
Start buying out an existing business.
Starting from scratch.
Financing the small business
Personal funds and funds borrowed from family and friends.
Venture capital firms.
Sources of management advice
Board of directors.
Franchising is an arrangement in which a buyer (the franchisee) purchase the right to sell the good or services of the seller (the franchiser).
Advantages of franchising
Enable the franchiser to grow rapidly by using other people’s (the franchisees’) money.
Franchising combines the benefits of owning a small business with the management skills available from a big business; not having to start the business from scratch.
Disadvantages of franchising
Lack of independence.
Lack of individual identity.
Difficulty in severing ties.
Risk of Chain’s collapsing.
Reading: Griffin, Business, Chapter 4
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