Study Notes: Ownership of Firms

Hey everyone! Ever wondered who owns the local cha chaan teng, the MTR, or a huge bank like HSBC? In economics, the way a business is owned makes a huge difference in how it operates, the risks it takes, and how it grows. This chapter will break down the different types of business ownership. It might sound complicated, but we'll use simple examples to make it super clear. Let's get started!


First Things First: What Exactly is a Firm?

Before we talk about ownership, let's be clear on what a firm is. Think of it as the "brain" of a business.

A firm is any organisation that brings together factors of production (like labour, capital, and land) to produce goods and services with the goal of selling them.

For example, a bakery is a firm. It hires bakers (labour), uses ovens and mixers (capital), and pays rent for its shop (land) to produce and sell bread.

Key Takeaway

A firm is the decision-making unit in production. Simple as that!


Public vs. Private Ownership: Who's the Boss?

All firms can be sorted into two main categories based on who owns them: Public Ownership and Private Ownership.

1. Public Ownership: Owned by 'Us'!

A firm under public ownership is owned and operated by the government on behalf of the public. The main goal is usually to provide essential services to society, rather than just to maximise profit.

Key Features:

  • Owner: The government.
  • Main Goal: To provide public services (e.g., healthcare, education, broadcasting). Profit is often a secondary concern.

Examples in Hong Kong:

  • The Hospital Authority (which runs public hospitals like Queen Mary Hospital).
  • Radio Television Hong Kong (RTHK).
  • Public libraries and swimming pools managed by the government.
Did you know?

While the MTR Corporation is listed on the stock exchange (meaning private individuals can own parts of it), the Hong Kong Government is still the majority shareholder. This makes it an interesting mix of public and private ownership!

Key Takeaway

Public ownership = Owned by the government. The focus is on providing services to the public.


2. Private Ownership: Businesses for Profit

A firm under private ownership is owned and operated by private individuals or groups. The primary goal is almost always to maximise profit.

There are four main types of private ownership you need to know. Let's break them down one by one.

a. Sole Proprietorship: The One-Person Show

This is the simplest form of business, owned and run by just one person.

Think of your local small noodle shop, a freelance designer, or a private tutor.

Key Features:

  • Number of Owners: One.
  • Legal Status: The owner and the business are the same. There is no separate legal identity. This means if the business is sued, the owner is sued personally.
  • Liability: The owner has unlimited liability. (We'll explain this super important concept in a moment!)
  • Profits: The owner keeps all profits.
b. Partnership: Stronger Together

A business owned and run by 2 to 20 people (partners). They usually sign a partnership agreement that outlines how profits, losses, and duties are shared.

Think of a small accounting firm, a doctor's clinic, or a law firm started by a few friends.

Key Features:

  • Number of Owners: 2 to 20 partners.
  • Legal Status: Just like a sole proprietorship, there is no separate legal identity.
  • Liability: Partners usually have unlimited liability.
  • Profits: Shared among partners according to their agreement.

(Syllabus Note: You don't need to know about different types of partnerships, like general or limited partnerships. Just the basics are fine!)


A Super Important Concept: Liability (Limited vs. Unlimited)

This is a HUGE concept in this chapter, and it's a favourite for exam questions. Don't worry, it's easy once you get the idea.

Unlimited Liability

This is the risky one! It means the owner's personal belongings are at risk if the business fails and has debts.

Analogy: Imagine you open a small shop (a sole proprietorship) and take out a $500,000 loan. Sadly, the business fails. You still owe the bank $500,000. Because you have unlimited liability, the bank can take your personal assets – your car, your savings, even your flat – to pay off the debt.

Applies to: Sole Proprietorships & Partnerships.

Limited Liability

This is the safe one! It means the owner's personal belongings are protected. The maximum amount of money an owner can lose is the amount they invested in the company.

Analogy: Imagine you invest $50,000 to buy shares in a company. The company goes bankrupt and has huge debts. The most you can possibly lose is your initial $50,000 investment. Creditors CANNOT come after your car, your savings, or your flat. Your personal assets are safe.

Applies to: Limited Companies.

Quick Review: Liability

Unlimited: "My personal stuff is AT RISK!" (Sole Proprietorship, Partnership)

Limited: "I can only lose what I invested. My personal stuff is SAFE." (Limited Companies)


c. Private Limited Company (Ltd.)

This is a more formal business structure. The owners are called shareholders.

Think of many family-run businesses or successful startups that have grown bigger. You'll see "Limited" or "Ltd." at the end of their name.

Key Features:

  • Number of Owners: 1 to 50 shareholders.
  • Legal Status: It has a separate legal identity. The company is like a legal "person". It can own assets, make contracts, and be sued in its own name, separate from its owners.
  • Liability: Shareholders have limited liability. (Hooray!)
  • Shares: Shares CANNOT be sold to the general public. They are sold privately to friends, family, or investors.
d. Public Limited Company (Listed Company)

This is usually a very large company whose shares are available for anyone to buy or sell on a stock exchange.

Think of the biggest names you know: HSBC, Tencent, Cathay Pacific, CK Hutchison.

Key Features:

  • Number of Owners: At least two, and can be thousands or even millions of shareholders.
  • Legal Status: It has a separate legal identity.
  • Liability: Shareholders have limited liability.
  • Shares: Shares are traded freely on a stock exchange, like the Hong Kong Stock Exchange. This makes it easy to raise large amounts of capital.

Summary: Comparing Private Firms

Quick Comparison Table

Feature

Number of Owners
Legal Status
Owner's Liability
Main Advantage
Main Disadvantage

Sole Proprietorship

1
No separate legal identity
Unlimited
Easy to set up, owner gets all profit
Unlimited liability, hard to raise money

Partnership

2 - 20
No separate legal identity
Unlimited
More capital & ideas than sole prop.
Unlimited liability, potential conflicts

Private Ltd. Co.

1 - 50 shareholders
Separate legal identity
Limited
Limited liability, easier to raise funds
Shares cannot be sold to the public

Public Ltd. Co.

Min. 2, usually thousands
Separate legal identity
Limited
Easy to raise HUGE capital sums
Complex to manage, strict regulations


How Big Companies Get Cash: Shares vs. Bonds

Limited companies, especially public ones, need a lot of money to grow. They mainly get this by issuing shares and bonds. It's crucial to know the difference!

What are Shares? (Becoming an Owner)

A share represents a piece of ownership in a company. When you buy a share, you become a part-owner (a shareholder).

Analogy: Think of a company as a big pizza. Issuing shares is like cutting the pizza into millions of tiny slices and selling them. You get money for each slice, but you now own less of the pizza yourself.

What are Bonds? (Becoming a Lender)

A bond is basically a loan. When a company issues a bond, it is borrowing money. The person who buys the bond (the bondholder) is lending money to the company.

Analogy: Issuing a bond is like giving someone an official "IOU" note. You borrow money from them and promise to pay it back in full on a future date, with regular interest payments along the way.

Key Differences: Shares vs. Bonds

Feature
Shares
Bonds

What it represents
Ownership (Equity)
Loan (Debt)

Holder is called a...
Shareholder (an owner)
Bondholder (a lender/creditor)

Return for investor
Dividends (a share of profits) - not guaranteed.
Interest - a fixed, regular payment.

Risk for investor
High. Can lose the entire investment.
Lower. You are legally owed the money.

Control
Usually have voting rights on company matters.
No voting rights.

Why would a firm issue one over the other?
  • Issuing Shares is good because: The money raised doesn't need to be paid back, and dividends only have to be paid if the company is profitable.
  • Issuing Shares is bad because: The original owners lose some of their ownership and control (their "slice of the pizza" gets smaller).
  • Issuing Bonds is good because: The owners don't give up any ownership or control.
  • Issuing Bonds is bad because: The loan MUST be repaid, and interest MUST be paid regularly, even if the company is losing money. This increases the risk of bankruptcy.
Why would an investor buy one over the other?
  • Buying Shares is for: Investors seeking high potential returns who are willing to take on high risk.
  • Buying Bonds is for: Investors seeking a steady, predictable income (the interest payments) with lower risk.
Key Takeaway

Remember this simple trick: Shares = Sharing Ownership. Bonds = Being the Bank.