Chapter 2 Part 2 by SK

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AS – Business Studies
Unit # 1 –Business & its environment Part 2 – by S.K 😊
(Chapter # 2 Business structure)
Legal formalities in setting up a COMPANY

All governments insist that certain legal stages are completed before a company may be established,
to protect investors and creditors.
The following documents are commonly required in many countries:
1 A Memorandum of Association must be completed.
It contains:
Maximum share capital

Company’s aims / objectives
2 The other main document is called the Articles of Association.
It contains:
Internal matters to operate

Meetings of directors
Meetings with shareholders etc.
When these documents have been completed satisfactorily, the registrar of companies will issue
a certificate of incorporation. Private limited companies may now begin trading.
Key Terms
Memorandum of Association: this states the name of the company , the address of
the head office through which it can be contacted, the maximum the share capital for
which the company seeks authorization and the declared aims of the business.
Articles of association: this documents covers the internal workings and control of
the business, the names of directors and the procedures to be followed at meetings.
Page 1|5 Prepared & Compiled by M. Sajid Kapadia (ACA, FCCA)

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Cooperatives
KeyTerm
Certain features are common to all cooperatives:
 All members can contribute to running the business and sharing the workload, responsibilities
and decision-making.
 All members have one vote at important meetings.
 Profits are shared equally among members.
In agricultural cooperatives, the members arrange for the purchase of seeds and materials in bulk so
that they may benefit from economies of scale. The cooperative often buys the produce of the
members and then sells it collectively to obtain a better price.
The advantages of such business units are:

 buying in bulk
 working together to solve problems and take decisions
 good motivation for all members to work hard as they will benefit from shared profits.
The potential drawbacks can include:

 poor management skills, unless professional managers are employed
 capital shortages because the sale of shares to non-members is not allowed
 slow decision-making if all members are to be consulted on important issues.
Franchises
A franchise is not strictly a form of legal structure for a business, but it is a legal contract between
a franchiser and a franchisee.
Key Terms
Franchise: the legal right use the name, logo and trading systems of an
existing successful business.
Franchiser: a person or business that sells the right to open stores and sell
products or services, using the brand name and brand identity.

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Franchisee: a person or business that buys the right from the franchiser to
operate the franchise.
This contract allows the following:

 to use the name
 logo and
 marketing methods of the franchiser.
The franchisee can then, separately, decide which form of legal structure to adopt.
General Reading
Franchises are a rapidly expanding form of business operation. They have allowed certain
multinational businesses, which are now household names, to expand much more rapidly than they
could otherwise have done. McDonald’s and Ben & Jerry’s are just two examples.
More Examples
Advantages of franchises Disadvantages of franchises

 There are fewer chances of a new  A share of the profits or revenue has to
business failing because it is using an be paid to the franchiser each year.
established brand name and product.  The initial franchise license fee can be
 Advice and training are offered by the expensive.
franchiser.  Local promotions may still have to be
 The franchiser pays for national paid for by the franchisee.
advertising.  The franchisee cannot choose which
 Supplies are obtained from established supplies or suppliers to use.
and quality-checked suppliers.  Strict rules over pricing and layout of the
 The franchiser agrees not to open outlet reduce the franchisee’s control
another over their own business.
 branch in the local area.
Advantages and disadvantages of franchises

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Joint ventures
A joint venture is when two or more businesses work closely together on a project. This is not the
same as a merger, but can lead to a merger if businesses’ interests coincide and if the joint venture
is successful.
The reasons for joint ventures are:
 The costs and risks of a new business venture are shared.

 Different companies might have different strengths and experiences, and therefore will mutual
benefit each other.
 They might have major markets in different countries and they could exploit these with the
new product more effectively than if they both decided to ‘go it alone’.
Or say
Can tap new markets together rather than doing business alone.
Key Terms
Joint venture: Two or more businesses agrees to work closely together on a
particular project and create a separate business division to do so.
Such agreements are not without their risks: (or say Disadvantages )
 Styles of management and culture might be so different that the two teams do not blend well
together.
 Errors and mistakes might lead to one company blaming the other for mistakes.
 The business failure of one of the partners would put the whole project at risk.
Social enterprise
Social enterprises are businesses that aim to make profit in socially responsible ways. Much of any
profit is used to benefit society. However, social entrepreneurs do not operate businesses as charities.
They can and often do keep some of any profit they have made.
Key Terms
Social enterprise: A business with mainly social objectives that re-invest
most of its profits into benefiting society rather than maximising returns to
owners.

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Social enterprises do have objectives that are often different from those of an entrepreneur who is
only profit motivated.
However, they compete with other businesses in the same market or industry. They use business
principles to achieve social objectives.
Most social enterprises have these common features:
 They directly produce goods or provide services.

 They have social aims and use ethical ways of achieving them.
 They need to make a profit to survive as they cannot rely on donations as charities do.
Changing the form of business ownership
Most businesses do not change their form of business ownership over time, but many do. The most
likely advantages of changing from one form of ownership to another (for example, sole trader to
private limited company) can be summarised as:
 access to more finance

 gaining legal identity
 protecting owners’ capital through limited liability.
The most likely disadvantages of changing the form of business ownership (for example, from sole
trader to private limited company) can be summarised as:
 legal costs and formalities

 some loss of control and ownership by the original owner
 profits are shared.
Next Chapter
Size of Business ………..

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Titan college

Legal formalities in setting up a COMPANY

1 A Memorandum of Association must be completed.

Maximum share capital

2 The other main document is called the Articles of Association.

Internal matters to operate

Page 1|5 Prepared & Compiled by M. Sajid Kapadia (ACA, FCCA)

Certain features are common to all cooperatives:

The advantages of such business units are:

The potential drawbacks can include:

Page 2|5 Prepared & Compiled by M. Sajid Kapadia (ACA, FCCA)

This contract allows the following:

Advantages of franchises Disadvantages of franchises

Advantages and disadvantages of franchises

Page 3|5 Prepared & Compiled by M. Sajid Kapadia (ACA, FCCA)

The reasons for joint ventures are:

 The costs and risks of a new business venture are shared.

Page 4|5 Prepared & Compiled by M. Sajid Kapadia (ACA, FCCA)

 They directly produce goods or provide services.

Changing the form of business ownership

 access to more finance

 legal costs and formalities

Size of Business ………..

Page 5|5 Prepared & Compiled by M. Sajid Kapadia (ACA, FCCA)

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