ACCA Applied Knowledge · Business and Technology

The purpose and types of business organisation: formula sheet

Full chapter guide

Key formulas

Sole trader: One owner; no separate legal entity; unlimited liability; Owner keeps all profit and bears all losses personally.
Partnership (general): 2 or more owners; usually no separate legal entity; liability usually unlimited; Limited liability partnerships exist in many countries and differ from this.
Company: Separate legal entity; shareholders own; directors manage; liability normally limited; Limited to the unpaid amount on shares.
Private vs public company: Private: shares not offered to the public. Public: shares can be offered to the public; Public does not automatically mean listed on an exchange.
Sector test: Public = government owned; Private = owned by individuals or companies; Not-for-profit = surplus reinvested in the cause; Ask who owns it and what its main aim is.
Value for money (3Es): Value for money = Economy + Efficiency + Effectiveness; Economy is spending less on inputs. Efficiency is getting the most output from inputs. Effectiveness is achieving the objectives set. Used mainly for public sector and NFP bodies.
Classification test: Sector = Owner + Funding source + Main objective; Private: investors, capital and profit. Public: government, taxation and service. NFP: members or trustees, donations and fees, and a cause.
Surplus rule for NFP: Surplus is reinvested, not distributed to owners; NFPs can earn a surplus. What defines them is that it is not paid out as profit.
Purpose to objectives chain: Purpose → Mission → Goals → Objectives; Moves from broad and general to specific and measurable.
Objective quality (SMART): Specific, Measurable, Achievable, Realistic, Time-bound; A good objective passes all five tests. Some sources use slightly different wording for A and R.
Shareholder wealth: Shareholder return = dividends received + increase in share price; Wealth depends on both parts, over time and adjusted for risk.
Value for money: Value for money = economy + efficiency + effectiveness; The usual objective test for public sector and not-for-profit bodies.
Internal stakeholders: Employees, managers, directors; Work within the organisation.
Connected stakeholders: Shareholders, lenders, customers, suppliers, competitors; Direct economic or contractual link with the organisation.
External stakeholders: Government, regulators, pressure groups, community, media; Affect or are affected by the organisation without a direct commercial link. Trade unions are often placed here, but they represent employees.
High power, high interest: Key players → manage closely; Involve them in decisions. Example: major shareholders.
High power, low interest: Keep satisfied; Do enough to stop their interest rising. Example: a regulator in normal times.
Low power, high interest: Keep informed; Communicate and consult. Example: employees, local community.
Low power, low interest: Minimal effort / monitor; Watch for change in their position.
Shareholder's maximum loss: Maximum loss = amount unpaid on shares + any amount already paid and lost; In a company limited by shares, you cannot be asked for more than the unpaid amount. Fully paid shares mean no further liability, but the amount invested can be lost.
Separate legal personality: Company ≠ its shareholders ≠ its directors; The company owns the assets and owes the debts. Owners do not, except where they have given personal guarantees.
Sole trader/partnership liability: Owner liability = unlimited (for ordinary partnerships and sole traders); Personal assets can be used to meet business debts. Many countries also allow limited liability partnerships, which are different.
Private vs public company: Private: no public offer of shares. Public: may offer shares to the public; Details such as minimum capital vary by country. Say 'usually' or 'in many jurisdictions' unless the question gives rules.
Return to shareholders: Total return = dividends received + increase in share price; Dividends are not guaranteed. Lenders have a right to interest, shareholders do not.

Quick revision

A sole trader is one person running a business and has unlimited personal liability.
A partnership has two or more owners. In a general partnership, liability is normally unlimited.
A company has separate legal personality, so it is a legal person distinct from its owners.
Limited liability means shareholders lose at most the amount unpaid on their shares.
Public sector bodies are owned and run by government and aim to provide services.
Private sector organisations are owned by individuals or companies and usually aim for profit.
Not-for-profit bodies pursue a cause and reinvest any surplus rather than distribute it.
Profit maximisation is a common private sector objective. Value for money suits public bodies.
Stakeholders are anyone affected by or able to affect an organisation.
Stakeholders can be internal, connected or external.
Stakeholder conflict arises when groups want different things, such as higher dividends versus higher wages.
Shareholders own a company, while directors manage it on their behalf.

Common mistakes

Saying a sole trader business has no owner liability protection because it is small, or that a sole trader has a separate legal identity. Fix: A sole trader and the business are the same legal person. Liability is unlimited.
Assuming all partners always have limited liability. Fix: In a general partnership liability is usually unlimited. Limited liability applies to companies and to limited liability partnerships where the law allows.
Saying not-for-profit organisations cannot make a surplus. Fix: State that they may make a surplus but reinvest it in their purpose rather than distribute it.
Assuming all public sector bodies are funded only by taxation. Fix: Say funding is mainly from taxation but may include fees, charges and borrowing.
Treating mission, goals and objectives as the same thing. Fix: Use the ladder: mission is why, goals are broad aims, objectives are measurable targets with a deadline.
Saying profit maximisation and shareholder wealth maximisation are identical. Fix: Remember wealth also covers timing, risk and long-term share value, while profit is a short-term accounting figure.
Classifying shareholders as internal stakeholders. Fix: In ACCA's classification shareholders are connected. Internal means employees and managers working in the organisation.
Mixing up the strategies for the two middle boxes of the matrix. Fix: High power, low interest means keep satisfied. Low power, high interest means keep informed. Power comes first in the name: power high means satisfy.
Saying shareholders can never lose more than they invested. Fix: Say they are liable only for the unpaid amount on their shares. If shares are partly paid, they may be called to pay the rest.
Confusing a private company with a private sector business. Fix: Private sector means not government-owned. A private company is a legal form that usually cannot offer shares to the public. A public company can still be a private sector business.

Exam tips

Look for the keyword that fixes the type: 'separate legal entity', 'unlimited liability' or 'government owned'.
Do not rely on local law. Answer from the general features given in the question.
In multiple response, check each option separately as true or false, then count against the number asked for.
Watch the words 'public' and 'private'. Decide whether the question means sector or type of company.
Expect these ideas to be linked to stakeholders, governance and objectives in the four-mark Section B multi-task questions, one on each of the six syllabus sections.
Section A questions usually test definitions and matching, so learn the owner, funding and objective of each sector.
In multiple response questions, select exactly the number stated and avoid options with absolute words such as always.
Use the 3Es to explain public sector performance; examiners expect that language.