BAFS Study Notes: Forms of Business Ownership

Hey BAFS students! Ever wondered how a business starts? Why is your local corner shop run by one person, while a company like HSBC has thousands of owners? It all comes down to its form of ownership. This is one of the very first big decisions an entrepreneur has to make!

In these notes, we'll explore the three main types of business ownership: Sole Proprietorships, Partnerships, and Limited Companies. Understanding them is crucial because the choice affects everything from who's in charge to who pays the bills if things go wrong. Let's dive in!


The Big Three: An Overview

Think of choosing a business structure like picking a character in a video game. Each one has unique strengths, weaknesses, and special abilities. The three main characters in the business world are:

  1. Sole Proprietorship: The solo hero. One person runs the whole show.
  2. Partnership: The dynamic duo (or trio, or more!). A team of people who join forces.
  3. Limited Company: The powerful corporation. A separate entity with its own legal identity.


1. Sole Proprietorship: The One-Person Show

What is a Sole Proprietorship?

This is the simplest form of business. It's owned and operated by just one person. The owner is the business, and the business is the owner. They are legally the same thing.

Examples: A freelance photographer, a private tutor, a small neighbourhood fruit stall, a single person running an online store.

Key Concept: Unlimited Liability

Don't worry if this sounds tricky, it's a super important idea! Unlimited liability means the owner is personally responsible for all the business's debts.

Analogy: The Leaky Cup
Imagine your business's money is in one cup, and your personal savings (your home, your car) are in another cup. With unlimited liability, there's no wall between the cups. If the business cup runs empty and still owes money (debt), creditors can start taking from your personal cup to pay it off. Yikes!

Characteristics of a Sole Proprietorship
  • Owner: One single individual.
  • Control: The owner has 100% control and makes all decisions.
  • Profits: The owner keeps all the profits.
  • Legal Status: The business is not a separate legal entity. The law sees the owner and the business as one and the same.
  • Liability: The owner has unlimited liability.
  • Continuity: The business has no separate life. If the owner retires or passes away, the business legally ends.
Evaluating Sole Proprietorships: Pros and Cons

Advantages (Pros):

  • Easy to Start: Very few legal formalities.
  • Full Control: You're the boss, so decisions are made quickly.
  • All Profits to Owner: You don't have to share your success.
  • Direct Customer Contact: Easy to build personal relationships with customers.

Disadvantages (Cons):

  • Unlimited Liability: This is the biggest risk! Your personal assets are on the line.
  • Limited Capital: It's hard to raise money; you can only use your own savings or get small loans.
  • Limited Skills: You have to be good at everything – marketing, finance, sales, etc.
  • Lack of Continuity: The business 'dies' with the owner.

Key Takeaway: Sole Proprietorship

This is a great choice for small, low-risk businesses where one person wants full control. But the owner must be prepared to accept the huge risk of unlimited liability.



2. Partnership: Teaming Up

What is a Partnership?

A partnership is a business owned by two or more people (usually up to a maximum of 20) who agree to run a business together to make a profit. They share the work, the decisions, and the profits.

Examples: A law firm founded by two lawyers, an accounting firm, two friends opening a café together.

Types of Partners: A Crucial Difference

The syllabus requires you to know two types of partners:

  1. General Partners: These are the 'active' partners. They manage the business and have unlimited liability, just like a sole proprietor. They are personally responsible for all business debts.
  2. Limited Partners: These are often 'silent' partners or investors. They contribute capital (money) to the business but do not take part in the daily management. Their key feature is limited liability – they can only lose the amount of money they invested. Their personal assets are safe!

Analogy: Driving the Car
Think of the business as a car. The General Partners are the drivers. They are in control, but if there's a crash (debt), they are fully responsible. The Limited Partners are just passengers who paid for a ticket (their investment). If the car crashes, the most they can lose is the price of their ticket. The other driver can't sue them for their house!

Characteristics of a Partnership
  • Owners: Two or more partners.
  • Capital: More capital can be raised compared to a sole proprietorship because multiple people are contributing.
  • Control: Decisions and workload are shared among the partners.
  • Profits: Profits are shared according to a Partnership Agreement (a legal document outlining the rules).
  • Legal Status: Like a sole proprietorship, a partnership is not a separate legal entity.
  • Liability: General partners have unlimited liability. Limited partners have limited liability.
Evaluating Partnerships: Pros and Cons

Advantages (Pros):

  • More Capital: More owners means more money to start and grow the business.
  • Shared Workload & Skills: Partners can specialise in different areas (e.g., one handles marketing, the other handles finance).
  • Easier to Borrow Money: Banks may be more willing to lend to a partnership than a sole proprietorship.

Disadvantages (Cons):

  • Unlimited Liability (for General Partners): Still a major risk for the active partners.
  • Shared Profits: You have to split the profits with your partners.
  • Potential for Disagreements: Arguments between partners can destroy a business.
  • Slower Decisions: All major decisions need to be agreed upon by the partners.

Key Takeaway: Partnership

A partnership allows people to combine their money and skills. It's a step up from a sole proprietorship but retains the major risk of unlimited liability for general partners. The relationship between partners is key to success.



3. Limited Company: The Corporate Shield

What is a Limited Company?

This is a more complex form of business. A limited company is recognised by the law as a separate legal entity from its owners. The owners are called shareholders, and the company is run by a Board of Directors.

Examples: Almost all big companies you know! HSBC, MTR Corporation, Apple, Cathay Pacific. Many smaller family businesses are also set up as private limited companies.

Key Concepts: The Game Changers
  1. Separate Legal Entity: This is the most important idea! The company is treated as an 'artificial person' in the eyes of the law. It can own assets, sign contracts, sue, and be sued in its own name. The company is separate from its owners.
  2. Limited Liability: Because the company is a separate person, it is responsible for its own debts. The shareholders are NOT personally responsible. Their liability is limited to the amount they invested in their shares. If the company goes bankrupt, the most a shareholder can lose is the money they paid for their shares. Their personal assets are 100% safe. This is often called the 'corporate shield'.

Analogy: The Robot You Built
Imagine you build and own a robot (the limited company). You are the shareholder. The robot goes out and does business. If the robot accidentally breaks something valuable, the person sues the ROBOT, not you. The robot has to pay from its own robot bank account. The most you can lose is the money you spent building the robot. Your own house and savings are safe!

Types of Limited Companies
  • Private Limited Company (Ltd.): Cannot sell its shares to the general public. Shares are sold privately. Often smaller or family-owned businesses.
  • Public Limited Company (PLC): Can sell its shares to the general public, usually on a stock exchange. These are the large corporations.
Evaluating Limited Companies: Pros and Cons

Advantages (Pros):

  • Limited Liability: This is the number one advantage! It protects the personal wealth of the owners.
  • Separate Legal Entity: The business can continue even if the owners change. This gives it perpetual continuity.
  • Easy to Raise Capital: Can sell shares to many investors to raise large sums of money.
  • Professional Management: Owners (shareholders) can hire expert directors to run the company for them.

Disadvantages (Cons):

  • Complex and Costly to Set Up: More legal paperwork and higher fees are involved.
  • More Regulations: Must publish financial accounts and follow strict company laws.
  • Less Privacy: Company information is often public.
  • Owners May Lose Control: The original founders can lose control if they sell too many shares.

Key Takeaway: Limited Company

The limited company is the safest form of ownership for owners due to limited liability and separate legal entity status. It is the best structure for businesses that want to grow large and raise a lot of capital.



Quick Comparison Table

Feature Sole Proprietorship Partnership Private Limited Company
Owners 1 person 2 - 20 (General Partners) 1 - 50 (Shareholders)
Owner's Liability Unlimited Unlimited (for General Partners) Limited
Legal Status Not a separate entity Not a separate entity Is a separate legal entity
Continuity Ends with owner Can end if a partner leaves Perpetual (continues forever)
Ability to Raise Capital Low Medium High


Multinational Corporations (MNCs) in Hong Kong

What is an MNC?

A Multinational Corporation (MNC) is a large company that has business operations, such as factories, offices, or shops, in two or more countries. They are typically public limited companies with their headquarters in one country and operations spread across the globe.

Think of the brands you see every day in Hong Kong: McDonald's, 7-Eleven, IKEA, Google, HSBC, Apple. These are all MNCs!

Characteristics of MNCs in Hong Kong
  • Global Scale: They operate on a massive, worldwide scale.
  • Regional Headquarters: Hong Kong's strategic location and business-friendly environment make it a popular city for MNCs to set up their Asia-Pacific headquarters.
  • Job Creation: They provide a large number of jobs for the local workforce.
  • Capital and Technology Transfer: MNCs bring advanced technology, management techniques, and significant investment into Hong Kong.
  • Strong Brand Image: They have globally recognised brands and invest heavily in marketing.
  • High Competitiveness: They create intense competition for local businesses.

Key Takeaway: MNCs

MNCs are global giants that play a significant role in Hong Kong's economy by providing jobs, investment, and technology. They are almost always structured as public limited companies to manage their vast operations and raise the necessary capital.