HKUGA College S3 Business Studies 2024-2025 Past Paper PDF

HKUGA College S3 Business Studies (2024-2025) Module 1 - Introduction to Business Management Part A - Forms of Business Ownership Name: Class: ( ) Learning Objectives · Students are expected to (i) classify a private enterprise into s...

HKUGA College S3 Business Studies (2024-2025) Module 1 - Introduction to Business Management Part A - Forms of Business Ownership Name: Class: ( ) Learning Objectives · Students are expected to (i) classify a private enterprise into sole proprietorship, partnership or limited company, and (ii) understand the key features including legal status, liability, number of owners, etc. of different forms of private enterprise. · Students are expected to apply their knowledge in this topic by comparing the features, and hence the advantages and disadvantages, of different forms of private enterprise when they are given a concrete problem/situation. Setting up Your Company - Forms of Business Ownership Case Study 1 Cynthia is a fresh graduate who is good at making cake. She would like to open a café selling coffee and cakes, but she has no experience in setting up a business. She is thinking of the following two options. Option 1: running the café by herself Option 2: inviting her friend, Stella, to be a partner to run the café Discussion (a) Which option will you recommend to Cynthia? (free answer) (b) What are the advantages of Option 1 over Option 2? suggested points: more prompt decision-making; free transfer of ownership; sole claim of profits (c) What are the disadvantages of Option 1 over Option 2? suggested points: narrower sources of capital; narrower division of labour; heavier workload; owner bears all business risks. P. 2 of 11  Case Study 1 (d) What are the advantages of Option 2 over Option 1? suggested points: wider sources of capital; wider scope of division of labour; sharing workload; sharing business risk (e) What are the disadvantages of Option 2 over Option 1? suggested points: less flexible in decision-making; transfer of ownership requiring Stella’s consent; sharing of profits; Cynthia is legally bound by the business decisions of Stella (collective responsibility). Glossary List 1 sole proprietorship a private enterprise owned by one person who bears unlimited liability (獨資經營) partnership a private enterprise owned by at least two owners who bear unlimited liability. (合夥業務) private enterprise an enterprise owned by private individual(s) or organisation(s) (私營企業) P. 3 of 11 Round-up - sole proprietorship and partnership Table - comparison between setting up sole proprietorship and partnership sole proprietorship partnership - more prompt decision-making - wider source of capital advantage - free transfer of ownership - wider scope of division of labour - sole claim of profits - partners share business risks - narrower source of capital - less flexible decision-making - narrower scope of division of labour - consent of all partners is required for admission and withdrawal of partners - owner bears all business risks disadvantage - all partners are legally bounded by business decisions of other partners (collective responsibility) - partners share parts of the profits P. 4 of 11 Case Study 1 (cont’d) Cynthia’s uncle, Stephen, is a business advisor. In a family dinner, he suggested Cynthia to set up the café in form of a limited company. Stephen provided the following information to Cynthia. (I) The legal status of a limited company is separated from its owner(s). It means that a limited company can own properties, enter into a contract, sue others and be sued in its name. However, the legal status of a sole proprietorship or a partnership is not separated from its owner(s). (II) As a result of (I) above, the owner(s) of a limited company enjoy limited liability, which means the liability of an owner is confined to the amount she invested in the business. However, the owner(s) of a sole proprietorship or a partnership bear(s) unlimited liability. (III) A sole proprietorship or a partnership will cease to exist when the owner / one of the owners dies or goes bankrupt (破產). However, a limited company will continue to exist even though its owner(s) die(s) or go(es) bankrupt. (IV) A limited company can issue debentures/bonds (債券) and shares (股票) to raise capital, but a sole proprietorship and a partnership cannot. (V) The set up of a sole proprietorship or a partnership requires a business registration certificate (商業 登記證) issued by the Inland Revenue Department (稅務局). However, the set up of a limited company requires the submission of multiple legal documents to the Companies Registry (公司註冊處). (VI) A sole proprietorship and a partnership pays 15% of its profits as profits tax (利得稅), but a limited company pays 16.5% of its profits as profits tax. Cynthia made up her mind and began running the café. Unfortunately, one day, nine customers suffered from food poisoning after having cakes from the café. It was found that the cakes were bad because the flour bought by Stella to make cakes was bad. Discussion (f) Study how the consequences to Cynthia and Stella will be different if they are in a different parallel universe. P. 5 of 11 Case Study 1 (cont’d) Universe X Universe Y Cynthia forming a partnership with Stella Cynthia forming a limited company with Stella (i) Explain whether Cynthia is legally responsible for selling bad cakes. (i) Explain whether Cynthia is legally responsible for selling bad cakes. Yes because Cynthia is legally bound by the business decisions made by No because the legal status of the café is separated from that of Cynthia. Stella. It is the café legally responsible for selling bad cakes. To pay compensation to those nine customers, Cynthia and Stella sold all the assets of the café, e.g. machines and utensils. However, the money received is still not enough to pay compensation to the victims. (ii) Explain whether Cynthia needs to sell her personal assets, e.g. deposits (ii) Explain whether Cynthia needs to sell her personal assets, e.g. deposits and residential properties, to pay compensation to those victims. and residential properties, to pay compensation to those victims. Yes because Cynthia bears unlimited liability as the partnership is NOT a No because Cynthia enjoys limited liability as the limited company is a separate legal entity, Cynthia and Stella are personally liable for all the separate legal entity, Cynthia’s liability is confined to the amount she has café’s debts. invested. (iii) What will happen to Cynthia if they still do not have enough money to (iii) What will happen to Cynthia if they do not have enough money to pay pay compensation after selling their personal assets? compensation after selling the café’s assets? Cynthia will declare bankrupt because her assets is not enough to cover It does not affect Cynthia, but the café will liquidate (清盤) because the her debts. café’s assets are not enough to cover its debts... P. 6 of 11 Case Study 1 (cont’d) Universe X Universe Y Cynthia forming a partnership with Stella Cynthia forming a limited company with Stella (iv) What are the advantages of forming a partnership over a limited (iv) What are the advantages of forming a limited company over a company? partnership? (V) simpler and less costly set-up procedure (I) separate legal status (VI) lower profits tax rate (II) limited liability of owner(s) (III) lasting continuity (IV) wider sources of capital (v) What are the disadvantages of forming a partnership over a limited company? (I) no separate legal status (II) unlimited liability of owner(s) (III) lack of continuity (v) What are the disadvantages of forming a limited company over a (IV) narrower sources of capital partnership? (V) more complicated and costly set-up procedure (VI) higher profits tax rate.. P. 7 of 11 Glossary List 2 limited company a private enterprise owned by at least one person who enjoy(s) limited liability in (有限公司) the business an enterprise and its owner(s) are regarded as separate legal entities (個體) under the law separate legal status the enterprise can own properties, enter into a contract, sue others and be sued by in its name the liability of the owner(s) of an enterprise is confined to the amount she invested limited liability in the enterprise (有限責任) the owner does not need to pay the enterprise’s debt with her personal properties Round-up - forms of private enterprise Diagram - classification of enterprise and private enterprise P. 8 of 11  Tables - features of different forms of private enterprise sole proprietorship partnership limited company number of owners 1 at least 2 at least 1 legal status of not a separate legal entity a separate legal entity enterprises liability of unlimited liability limited liability owners continuity of lack of continuity lasting continuity enterprises transfer of free consent of all partners required ownership profits tax rate lower (15%) higher (16.5%) sources of wider widest narrowest capital (more owners) (can issue bonds and shares) set-up procedure less complicated and less costly more complicated and more costly P. 9 of 11  sole proprietorship partnership limited company separation of ownership and not separated usually separated management flexibility in most flexible less flexible least flexible decision-making incentive to higher lower improve efficiency relationship with employees and closest close distant customers P. 10 of 11  Table - comparison between setting up a sole proprietorship / partnership and a limited company sole proprietorship / partnership limited company - lower profits tax rate - separate legal entity/status - simpler / less costly set-up procedure - limited liability of owners - stronger incentive to improve - lasting continuity advantage efficiency - wider source of capital (can issue - closer relationship with employees bonds and shares) and customers - separation of ownership and management - NO separate legal status - higher profits tax rate - unlimited liability of owners - more complicated/costly set-up procedure - lack of continuity - weaker incentive to improve efficiency - narrower source of capital (CANNOT disadvantage issue bonds and shares) - more distant relationship with employees and customers - NO separation of ownership and management - all partners are legally bound by business decisions of other partners [applicable to partnership ONLY] P. 11 of 11