II. The mistakes in the sentences below have been underlined. Correct them.

1. Diversification is the process whereby a firm shifts to being a single-producer.

2. Although a business produces a single product in a single market, it depends on that market.

3. Diversification enable the business to spread risk.

4. Businesses might also have encouraged to spread risk.

5. In other words, it is not only the current markets that may be limited in the level of profits, but also the growth of sales.

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The firm as a legal entity

The legal structure of the firm is likely to have a significant impact on its conduct, and subsequent performance, within the market place. There are several types of firm, each with a distinct legal status.

___ (1)

This is where the business is owned by just one person. Usually such businesses are small, with only a few employees. Retailing, building and farming are typical areas to find sole proprietorships. Such businesses are easy to set up and may require only a relatively small initial capital investment. They may well flourish if the owner is highly committed to the business, and they can be very flexible to changing market conditions. They suffer two main disadvantages, however:

• Limited scope for expansion. Finance is limited to what the owner can raise personally. Also there is a limit to the size of an organisation that one person can effectively control.

• Unlimited liability. The owner is personally liable for any losses that the business might make. It could result in the owner’s house, car and other assets being seized to pay off any outstanding debts.

___ (2)

This is where two or more people own the business. In most partnerships there is a legal limit of 20 partners. Partnerships are common in the same fields as sole-proprietorships. They are also common in the professions: solicitors, accountants, surveyors, etc. With more owners, there is more scope for expansion. More finance can be raised and the partners can each specialise in one aspect of the business.

Partners, however, still have unlimited liability. This problem could be very serious. The mistakes of one partner could jeopardise the personal assets of all the other partners.

Where large amounts of capital are required and/or when the risks of business failure are relatively high, partnerships are not an appropriate form of organisation. In such cases it is best to form a company (or “joint-stock company” to give it its full title).

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A company is legally separate from its owners. This means that it can enter into contracts and own property. Any debts are its debts, not the owners.

Each owner has a share in the company. The size of their share holdings will vary from one shareholder to another and will depend on the amount they invest. Each shareholder will receive his or her share of the company’s distributed profit. The payments to shareholders are called “dividends”.

The owners have only limited liability. This means that, if the company goes bankrupt, the owners will lose the amount of money they have invested in the company, but no more. Their personal assets cannot be seized. This has the advantage of encouraging people to become shareholders, and indeed large companies may have thousands of shareholders – some with very small holdings and others, including institutional shareholders such as pension funds, with very large holdings. Without the protection of limited liability, many of these investors would never put their money into any company that involved even the slightest risk.

Shareholders often take no part in the running of the firm. They may elect a board of directors which decides broad issues of company policy. The board of directors in turn appoints managers who make the day-to-day decisions. There are two types of companies: public and private.

Public limited companies. Don’t be confused by the title. A public limited company is still a private enterprise: it is not a nationalised industry. It is “public” because it can offer new shares publicly: by issuing a prospectus, it can invite the public to subscribe to a new share issue. In addition, many public limited companies are quoted on the Stock Exchange. This means that existing shareholders can sell some or all of their shares on the Stock Exchange. The prices of these shares will be determined by demand and supply. A public limited company must hold an annual shareholders’ meeting.

Private limited companies. Private limited companies cannot offer their shares publicly. Shares have to be sold privately. This makes it more difficult for private limited companies to raise finance, and consequently they tend to be smaller than public companies. They are, however, easier to set up than public companies.

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It is common, especially in large civil engineering projects that involve very high risks, for many firms to work together as a consortium. The Channel Tunnel and Thames Barrier are products of this form of business organisation. Within the consortium one firm may act as the managing contractor, while the other members may provide specialist services. Alternatively, management may be more equally shared.