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BGCSE Commerce 0598 study materials
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BGCSE Commerce 0598 practice questions

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Question 1The nature and scope of commerce

Which activity is best described as commerce rather than production?

  1. A miner extracting copper ore from the ground
  2. A factory turning timber into furniture
  3. A farmer harvesting maize from his own field
  4. A firm buying raw cotton and reselling it to a textile mill Correct answer.

Explanation

Commerce covers the activities that move goods and services from producers to consumers, including trade and the aids to trade such as transport, banking and insurance. Buying cotton to resell it to a mill is a trading activity that adds place and possession utility without changing the form of the good. Harvesting, manufacturing and mining all change the physical form of a product and therefore belong to production.

Question 2The nature and scope of commerce

A wholesaler buys 5 000 bags of rice from a mill and sells them in smaller lots to 40 retailers. Which function of the wholesaler does this best illustrate?

  1. Insuring goods in transit
  2. Financing the retailer's purchases
  3. Breaking bulk Correct answer.
  4. Providing market information

Explanation

Breaking bulk means dividing a large consignment bought from a producer into smaller quantities that retailers can handle and afford. The wholesaler here converts one big purchase into forty smaller sales, which is the classic bulk-breaking role. Financing, information and insurance are separate aids to trade and are not shown by the act of dividing the consignment.

Question 3The nature and scope of commerce

Which of the following is a direct service industry?

  1. Weaving cloth in a factory
  2. Teaching students in a secondary school Correct answer.
  3. Refining crude oil into petrol
  4. Baking bread for sale in a supermarket

Explanation

Direct services are performed on people themselves, such as education, medical care, hairdressing and transport of passengers. Teaching acts directly on the learner and does not create a tangible product. Baking, weaving and refining are secondary production because they transform raw materials into physical goods.

Question 4The nature and scope of commerce

Which aid to trade protects a trader against the risk of goods being lost at sea?

  1. Advertising
  2. Warehousing
  3. Banking
  4. Insurance Correct answer.

Explanation

Insurance transfers the risk of loss or damage from the trader to an insurer in return for a premium. A marine insurance policy covers goods while they are in transit, including carriage by sea. Advertising, warehousing and banking perform other supporting functions and do not themselves compensate for loss in transit.

Question 5The nature and scope of commerce

A country exports copper and imports machinery. Which statement about this trade is correct?

  1. The copper is an export and the machinery is an import Correct answer.
  2. Both the copper and the machinery are exports for that country
  3. The copper is an import and the machinery is an export
  4. Both the copper and the machinery are imports for that country

Explanation

Exports are goods sold to buyers in other countries, while imports are goods bought from suppliers abroad. Selling copper abroad earns foreign currency and is therefore an export, whereas buying machinery from abroad is an import. The direction of payment, not the type of good, decides the classification.

Question 6The nature and scope of commerce

Which pair correctly matches a document with its usual purpose in home trade?

  1. Order – promising to pay a debt later
  2. Enquiry – confirming that goods have been received
  3. Receipt – asking the supplier for a price list
  4. Invoice – requesting payment for goods supplied Correct answer.

Explanation

An invoice is sent by the seller after goods are supplied and states the quantity, price and amount due, so it acts as a request for payment. Each of the other documents has a different role in the trading sequence. Matching documents to their true purpose is essential for accurate record keeping.

Question 7The nature and scope of commerce

A small shopkeeper wants to accept card payments and keep cash safely overnight. Which aid to trade is most directly relevant?

  1. Transport
  2. Banking Correct answer.
  3. Advertising
  4. Warehousing

Explanation

Banking services include current accounts, card payment facilities and safe custody of cash, all of which meet the shopkeeper's needs. Banks also provide the payment systems that make card transactions possible. Transport, warehousing and advertising support trade in other ways and do not handle money.

Question 8The nature and scope of commerce

Which change in a country's economy shows a shift from primary to secondary production?

  1. A growing share of workers is employed in factories making processed foods Correct answer.
  2. More workers are employed catching fish than before
  3. An increasing number of workers provide banking services
  4. More people earn a living by guiding tourists

Explanation

Secondary production involves transforming raw materials into manufactured goods, so growth in factory employment signals a shift towards it. Primary production draws directly from nature, as in fishing, farming and mining. Tourism and banking are service activities and belong to the tertiary sector.

Question 9The nature and scope of commerce

A retailer buys goods on credit from a wholesaler and pays one month later. Which function of the wholesaler is being performed?

  1. Transporting goods
  2. Risk bearing
  3. Standardising goods
  4. Financing the retailer Correct answer.

Explanation

Granting trade credit means the wholesaler supplies goods now and receives payment later, which temporarily finances the retailer's stock. This allows the retailer to sell goods and earn income before settling the account. Transporting, risk bearing and standardising are distinct functions that do not describe the timing of payment.

Question 10The nature and scope of commerce

Which statement best explains why specialisation increases total output?

  1. Each worker performs many different tasks in the production process
  2. Production is spread evenly across all stages by every worker
  3. Each worker produces the complete item from start to finish
  4. Workers concentrate on tasks they perform best, avoiding time lost in switching Correct answer.

Explanation

Specialisation allows workers to concentrate on the tasks they do best, so skills improve and time is not wasted moving between different jobs. The division of labour also makes it easier to use specialised tools and machinery. Producing whole items individually or performing many unrelated tasks reduces these gains.

Question 11The nature and scope of commerce

Which feature distinguishes a supermarket from a department store?

  1. A supermarket sells only goods produced by one manufacturer
  2. A supermarket is organised into separate departments selling different product lines
  3. A supermarket offers credit accounts to all customers as standard
  4. A supermarket mainly uses self-service selling of food and household goods Correct answer.

Explanation

A supermarket is a large self-service store selling a wide range of food and household goods, usually arranged by product category rather than by brand. A department store is divided into separate departments, each handling a distinct line such as clothing or furniture. Credit facilities and single-manufacturer ranges are not defining features of supermarkets.

Question 12The nature and scope of commerce

A trader in a distant village needs goods quickly but transport costs are high. Which consideration should most influence the choice of transport?

  1. The colour of the delivery vehicles
  2. The value and urgency of the goods relative to the cost Correct answer.
  3. The number of employees in the supplier's office
  4. The size of the supplier's advertising budget

Explanation

Choosing a mode of transport involves balancing speed, cost, distance and the nature of the goods. High-value or perishable goods that are needed urgently can justify expensive air or express transport, while cheap bulky goods suit slower, cheaper methods. Vehicle colour, office staffing and advertising budgets do not affect the cost or speed of delivery.

Question 13The nature and scope of commerce

Which example best illustrates entrepot trade?

  1. A country sells its own agricultural produce directly to consumers at home
  2. A country imports goods from abroad and re-exports them to other countries without substantial processing Correct answer.
  3. A country buys goods from abroad for consumption by its own residents
  4. A country buys raw materials and uses them to manufacture goods for its own people

Explanation

Entrepot trade occurs when goods are imported and then re-exported, often after only minor repackaging or sorting, with the country acting as a distribution centre. The port or trading hub earns income from handling and storage rather than from manufacturing. Simple import for domestic use, home consumption of own produce, and manufacturing are different categories.

Question 14The nature and scope of commerce

Why does insurance require the insured to disclose all material facts when applying for cover?

  1. To remove the need for any premium payment
  2. So that the insurer can calculate a fair premium and avoid unfair selection of risks Correct answer.
  3. So that the insured can claim more than the value of the goods
  4. To allow the insurer to sell the insured's goods

Explanation

Insurance works by pooling many similar risks, so the insurer must know the true nature of each risk to set premiums that reflect expected losses. Material facts are those that would influence a prudent insurer's decision or the premium charged. Concealment can make a policy void, but disclosure never increases a claim beyond the actual loss or removes the premium.

Question 15The nature and scope of commerce

Which combination correctly describes the roles of the buyer and the seller in a trade transaction?

  1. The buyer issues the invoice and the seller sends the order
  2. The buyer sends the delivery note and the seller makes the payment
  3. The buyer issues the receipt and the seller sends the enquiry
  4. The buyer sends the enquiry and the seller issues the invoice Correct answer.

Explanation

The trading sequence normally begins with the buyer sending an enquiry, receiving a quotation, and placing an order. After the goods are supplied, the seller issues the invoice requesting payment, and the buyer pays and receives a receipt. Reversing these roles produces documents that would not make commercial sense.

Question 16The nature and scope of commerce

A government raises the tax on imported shoes while leaving domestic shoe prices unchanged. Which effect is most likely in the short run?

  1. Domestic consumers pay less for imported shoes
  2. Imported shoes become relatively more expensive and domestic demand for them falls Correct answer.
  3. The volume of shoe imports rises sharply
  4. Domestic shoe producers face stronger competition from cheaper imports

Explanation

A tax on imports raises the price consumers must pay for foreign shoes relative to home-produced substitutes. Consumers usually respond by buying fewer imports and more domestic shoes, which shelters local producers. Imports therefore tend to fall rather than rise, and consumers pay more, not less, for imported shoes.

Question 17The nature and scope of commerce

Which statement about the relationship between commerce and production is most accurate?

  1. Commerce is unnecessary once production has taken place
  2. Commerce creates the goods that production then distributes
  3. Commerce links producers with consumers and adds place and time utility to production output Correct answer.
  4. Commerce and production are identical activities with the same purpose

Explanation

Production creates goods and services, while commerce moves them from producers to consumers through trade and the aids to trade. In doing so commerce adds place utility by transporting goods and time utility by storing them until needed. Without commerce, output would remain with producers and consumers could not obtain it conveniently.

Question 18The nature and scope of commerce

A country's balance of trade shows a large surplus. Which conclusion can validly be drawn from this single piece of information?

  1. The country's total payments abroad exceed its total receipts
  2. The country's balance of payments must also be in surplus
  3. The country's visible exports exceed its visible imports for the period Correct answer.
  4. The country has no need to import any goods

Explanation

The balance of trade compares the value of visible exports with visible imports of goods only. A surplus means visible exports exceeded visible imports during the period. It says nothing definite about invisible trade, the overall balance of payments, or whether imports are needed, since a country may import heavily and still export more.

Question 19The nature and scope of commerce

Two firms merge: one owns a chain of retail shops and the other manufactures the goods those shops sell. Which type of integration is this?

  1. Vertical integration Correct answer.
  2. Conglomerate integration
  3. Horizontal integration
  4. Lateral integration

Explanation

Vertical integration combines firms at different stages of the same production and distribution chain, such as manufacturing and retailing. Horizontal integration joins firms at the same stage, while conglomerate integration joins unrelated businesses. Lateral integration links firms producing similar but not competing goods.

Question 20The nature and scope of commerce

A government wishes to protect an infant industry that is too small to compete with established foreign firms. Which policy is most consistent with this aim?

  1. Removing all tariffs so that foreign goods become cheaper
  2. Reducing investment in the industry's machinery
  3. Imposing a temporary tariff on competing imports while the industry grows Correct answer.
  4. Banning all domestic firms from exporting their output

Explanation

The infant industry argument holds that a new domestic industry may need temporary protection from established foreign competitors until it achieves scale and efficiency. A tariff raises the price of competing imports and gives the young industry room to grow, with protection withdrawn later. Removing tariffs, restricting exports or cutting investment would weaken rather than shelter the industry.

Question 21Business organisation and ownership

Which type of business organisation is owned and controlled by its members, who share profits in proportion to their purchases?

  1. A co-operative Correct answer.
  2. A sole trader
  3. A public limited company
  4. A private limited company

Explanation

A co-operative is owned and democratically controlled by its members, and any surplus is usually distributed as a dividend based on how much each member traded with the society rather than on share capital. This member-benefit principle distinguishes it from companies that reward shareholders.

Question 22Business organisation and ownership

What is the main advantage of operating as a sole trader?

  1. Shares can be sold to the public on a stock exchange
  2. Liability for debts is limited to the amount invested
  3. The business has a separate legal identity from its owner
  4. The owner keeps all profits and makes decisions quickly Correct answer.

Explanation

A sole trader owns the business personally, so all profit belongs to the owner and decisions can be taken without consulting partners or a board. The trade-off is unlimited liability and the absence of a separate legal personality.

Question 23Business organisation and ownership

In a partnership, what is the usual position of partners regarding business debts?

  1. They are protected because the partnership is a separate legal person
  2. They have unlimited liability and may lose personal assets Correct answer.
  3. They are liable only up to the capital they contributed
  4. They are liable only if they signed the original loan agreement

Explanation

In an ordinary partnership the partners are jointly and severally liable, meaning creditors can pursue a partner's personal assets for partnership debts. Limited liability arises only in special forms such as a limited liability partnership or a limited partnership with sleeping partners.

Question 24Business organisation and ownership

Which document must a company send to the registrar to obtain incorporation?

  1. The share certificate
  2. The memorandum and articles of association Correct answer.
  3. The partnership deed
  4. The annual trading account

Explanation

Incorporation requires constitutional documents, traditionally the memorandum of association and the articles of association, together with the required registration forms and fee. The registrar then issues a certificate of incorporation.

Question 25Business organisation and ownership

What does the term 'limited liability' mean for a shareholder?

  1. The shareholder can lose only the amount unpaid on their shares Correct answer.
  2. The shareholder must repay all company debts personally
  3. The company can never make a loss
  4. The shareholder's dividend is guaranteed each year

Explanation

Limited liability means a shareholder's maximum loss is the capital they have invested or agreed to invest, so personal assets are protected if the company fails. It does not guarantee profits or prevent the company itself from making losses.

Question 26Business organisation and ownership

Which feature distinguishes a public limited company from a private limited company?

  1. It is exempt from publishing annual accounts
  2. It must have fewer than fifty employees
  3. Its shares may be offered for sale to the general public Correct answer.
  4. It cannot issue shares at all

Explanation

A public limited company may raise capital by offering its shares to the public, usually through a stock exchange, whereas a private company may not. Public companies also face stricter disclosure requirements, not fewer.

Question 27Business organisation and ownership

What is a franchise?

  1. A merger between two competing companies
  2. A loan granted by a bank to a new business
  3. A government grant for small enterprises
  4. A licence to trade under another business's name and system Correct answer.

Explanation

A franchise is a contractual licence in which the franchisor allows the franchisee to use its brand, products and operating methods in return for fees and often a share of revenue. The franchisee owns their outlet but follows the franchisor's rules.

Question 28Business organisation and ownership

Which sector of the economy extracts raw materials directly from nature?

  1. The quaternary sector
  2. The tertiary sector
  3. The primary sector Correct answer.
  4. The secondary sector

Explanation

The primary sector covers activities such as farming, fishing, mining and forestry that take natural resources directly from the environment. Manufacturing belongs to the secondary sector and services to the tertiary sector.

Question 29Business organisation and ownership

A group of five farmers each contributes capital and agrees to share profits equally, with each liable for all debts of the venture. Which form of organisation have they formed?

  1. A public limited company
  2. A sole proprietorship
  3. A co-operative limited by shares
  4. An ordinary partnership Correct answer.

Explanation

Several owners sharing capital and profits under joint unlimited liability is the classic ordinary partnership. Because they are each liable for all debts, the arrangement cannot be a limited company, where liability would be capped.

Question 30Business organisation and ownership

A small bakery wants to raise extra capital but does not want to lose control or publish its accounts publicly. Which ownership form best suits this aim?

  1. A co-operative society
  2. A partnership with unlimited liability
  3. A private limited company Correct answer.
  4. A public limited company

Explanation

A private limited company can sell shares to a small circle of investors, raising capital while keeping ownership restricted and avoiding the full public disclosure required of public companies. Control stays with the existing shareholders who hold the majority of shares.

Question 31Business organisation and ownership

Why might a growing business choose to 'go public' by converting to a public limited company?

  1. To avoid the need for an annual general meeting
  2. To keep its financial affairs secret from competitors
  3. To reduce the amount of tax it pays on profits
  4. To raise large amounts of capital from a wide range of investors Correct answer.

Explanation

Floating on a stock exchange allows a company to attract capital from many investors at once, funding expansion on a scale that private sources may not match. The cost is greater regulation, public disclosure and possible loss of control.

Question 32Business organisation and ownership

What is the role of the board of directors in a company?

  1. To represent employees in wage negotiations
  2. To set strategy and make major decisions on behalf of shareholders Correct answer.
  3. To sell shares on behalf of individual shareholders
  4. To audit the company's accounts independently

Explanation

Directors are appointed by shareholders to run the company, set policy and take major decisions, and they are accountable to shareholders at general meetings. Independent auditors and trade unions perform the other functions listed.

Question 33Business organisation and ownership

Which statement best explains why a co-operative may struggle to raise large amounts of capital?

  1. Co-operatives cannot legally employ workers
  2. Members are not allowed to save money
  3. Co-operatives must pay all profits to the government
  4. Members have equal voting rights regardless of capital contributed Correct answer.

Explanation

Because voting is usually one member one vote, investors cannot gain extra control by contributing more capital, which weakens the incentive to invest large sums. This democratic principle limits the funds a co-operative can attract compared with a company.

Question 34Business organisation and ownership

A business is described as having 'unlimited liability'. What consequence does this have for its owner?

  1. The owner must pay a higher rate of income tax
  2. Personal assets may be seized to settle business debts Correct answer.
  3. The business may not borrow money from banks
  4. The owner must sell shares to the public

Explanation

Unlimited liability means the owner and business are not separate in law, so creditors can claim the owner's personal property if business assets are insufficient. It has no direct effect on tax rates or borrowing rights.

Question 35Business organisation and ownership

What is the main purpose of a business plan when seeking finance?

  1. To advertise the business to potential customers
  2. To convince lenders and investors that the venture is viable Correct answer.
  3. To satisfy the registrar that the company is legally formed
  4. To record the day-to-day cash transactions of the business

Explanation

A business plan sets out the market, operations and financial forecasts, allowing lenders and investors to judge risk and expected return before committing funds. It is a planning and persuasion document, not a bookkeeping or advertising tool.

Question 36Business organisation and ownership

Which of these is a disadvantage of operating as a partnership rather than as a sole trader?

  1. Partners lose the ability to raise capital
  2. Decision-making becomes impossible
  3. The business cannot employ staff
  4. Profits must be shared among the partners Correct answer.

Explanation

A partnership brings extra capital and skills, but every partner is entitled to a share of profits, so each individual receives less than a sole trader would. Partnerships may still employ staff and can raise more capital than a sole trader.

Question 37Business organisation and ownership

A government wishes to encourage small businesses in a region with high unemployment. Which measure would most directly support the formation of sole traders?

  1. Nationalising the region's largest factory
  2. Offering small start-up grants and free business advice Correct answer.
  3. Increasing import tariffs on foreign goods
  4. Raising the minimum size for company registration

Explanation

Grants and free advice lower the cost and risk of starting up, which directly encourages individuals to set up as sole traders. Nationalisation and tariffs affect existing large firms and prices rather than helping individuals to start businesses.

Question 38Business organisation and ownership

What is meant by the 'divorce of ownership from control' in a public limited company?

  1. Owners and managers are always the same people
  2. Directors own all shares while employees manage production
  3. The company is owned by the government but run by private firms
  4. Shareholders own the company but directors manage it day to day Correct answer.

Explanation

In large public companies, ownership is spread among many shareholders, while day-to-day control rests with salaried directors. This separation can create conflicts of interest, because managers may pursue their own goals rather than maximising shareholder value.

Question 39Business organisation and ownership

Which combination correctly matches a business form with its legal status?

  1. Private limited company: unlimited liability for shareholders
  2. Public limited company: shares may not be transferred
  3. Sole trader: no separate legal personality Correct answer.
  4. Partnership: separate legal personality in all cases

Explanation

A sole trader has no legal identity separate from the owner, so the owner is personally liable. Companies, by contrast, are separate legal persons with limited liability, and their shares are transferable.

Question 40Business organisation and ownership

A group of workers wants to buy the factory where they are employed and run it democratically. Which form of organisation is most appropriate?

  1. A franchise
  2. A worker co-operative Correct answer.
  3. A sleeping partnership
  4. A public limited company

Explanation

A worker co-operative is owned and controlled by the people who work in it, with decisions usually taken on a one-person one-vote basis. This matches the aim of democratic control by employees.

Question 41Business organisation and ownership

A sole trader's business fails with debts of $50,000 while business assets are worth $20,000. What happens under unlimited liability?

  1. The owner pays $20,000 and the debt is fully settled
  2. The owner pays nothing because the business has no money left
  3. The owner must pay the remaining $30,000 from personal assets Correct answer.
  4. The creditors must write off the whole $50,000

Explanation

Because a sole trader has unlimited liability, business and personal assets are treated together, so the shortfall of $30,000 must be met from the owner's personal property. Limited liability would have capped the loss at the amount invested.

Question 42Business organisation and ownership

Why might a large public company's directors pursue expansion even when it reduces shareholder dividends?

  1. Shareholders legally require expansion before dividends
  2. Directors' pay and prestige are often linked to the size of the firm Correct answer.
  3. Dividends are paid only by private companies
  4. Expansion always raises the share price in the short term

Explanation

When ownership is separated from control, directors may be rewarded according to sales or company size, giving them an incentive to expand even at the expense of dividends. This is a principal-agent problem that shareholders try to control through incentives and monitoring.

Question 43Business organisation and ownership

A partnership deed is silent on how profits are shared. What is the usual legal default?

  1. Profits are retained until a deed is written
  2. Profits and losses are shared equally among the partners Correct answer.
  3. Profits go entirely to the partner who works most hours
  4. Profits are shared in proportion to each partner's age

Explanation

Where no agreement exists, partnership law generally presumes that partners share profits and losses equally, regardless of the capital each contributed. Partners can avoid this by setting out a profit-sharing ratio in a written deed.

Question 44Business organisation and ownership

Which factor most strongly explains why many small sole traders remain unincorporated despite the risks of unlimited liability?

  1. Sole traders are legally barred from forming companies
  2. Banks refuse to lend to incorporated businesses
  3. Incorporation automatically removes the owner's control
  4. Incorporation brings compliance costs and public disclosure of accounts Correct answer.

Explanation

Forming and running a company involves registration fees, audited or published accounts and ongoing filing duties, which can outweigh the benefit of limited liability for a very small firm. Many sole traders therefore accept personal risk in exchange for low cost and privacy.

Question 45Business organisation and ownership

A co-operative and a public limited company both need new capital. Which statement best compares their ability to attract investors?

  1. The company can offer shares with voting power proportionate to investment, which attracts large investors Correct answer.
  2. Both face identical legal limits on the capital they may raise
  3. The co-operative may sell shares on a stock exchange but the company may not
  4. The co-operative can offer greater control to large investors, so it raises capital more easily

Explanation

A public company can reward large investors with more votes and dividends in proportion to their shareholding, which makes it attractive to institutional investors. A co-operative's one-member one-vote rule limits such incentives, constraining its access to large-scale capital.

Question 46Business organisation and ownership

Which type of business organisation is owned and controlled by its members on the principle of one member, one vote, regardless of how much capital each member has invested?

  1. A co-operative Correct answer.
  2. A sole trader
  3. A public limited company
  4. A private limited company

Explanation

A co-operative is democratically controlled, so each member normally has a single vote whatever their share of the capital. This differs from companies, where voting power usually follows the number of shares held. The principle reflects the co-operative's purpose of serving members rather than maximising returns to investors.

Question 47Business organisation and ownership

A business is set up as a private limited company. Which statement describes a legal consequence of this form of organisation?

  1. The company must offer its shares for sale to the general public
  2. The owners are personally liable for all debts the company cannot pay
  3. The company is a separate legal entity and the owners have limited liability Correct answer.
  4. The company cannot employ more than fifty workers at any one time

Explanation

Incorporation gives a company its own legal identity separate from its shareholders, so the company itself can own property, make contracts and be sued. Shareholders' liability is limited to the amount unpaid on their shares, which protects personal assets. This is the central legal advantage of forming a limited company rather than trading unincorporated.

Question 48Business organisation and ownership

A partnership agreement states that profits will be divided in the ratio 3:2 between two partners but says nothing about how losses are shared. How should losses normally be shared?

  1. Entirely by the partner with the larger capital
  2. In the same 3:2 ratio as profits Correct answer.
  3. Equally, one half each
  4. Entirely by the partner who manages the business day to day

Explanation

Where a partnership deed fixes a profit-sharing ratio but is silent on losses, the usual rule is that losses follow the same ratio as profits. The ratio reflects each partner's agreed share of the rewards and therefore of the risk. Partners can override this by stating a separate loss-sharing arrangement in the deed.

Question 49Business organisation and ownership

A family-owned private limited company needs substantial new investment for a new factory but wishes to keep control within the family. Which source of finance best fits this objective?

  1. Issuing additional shares to a small number of chosen private investors Correct answer.
  2. Converting into a co-operative owned by its customers
  3. Selling shares through a public advertisement to the general public
  4. Applying to list its shares on a stock exchange

Explanation

A private limited company can issue new shares to selected investors without offering them to the public, which raises funds while allowing the family to control who becomes a shareholder. Control can be preserved by limiting the number and size of new holdings. Public share offers and stock exchange listing would expose ownership to outsiders and dilute family control.

Question 50Business organisation and ownership

An entrepreneur is choosing between a sole trader structure and a private limited company for a new venture that will borrow heavily and carry significant risk of being sued by customers. Which analysis best explains why incorporation may be preferred?

  1. Incorporation means the owner can never be held responsible for any wrongdoing of the business
  2. Incorporation separates the business's legal identity from the owner, so personal assets are shielded if the business fails or is sued Correct answer.
  3. Incorporation guarantees that the business will pay less tax than an unincorporated trader
  4. Incorporation removes the need to keep accounting records or file any information about the business

Explanation

Because a company is a separate legal person, debts and court judgments are normally met from company assets, and shareholders lose only what they invested. For a high-risk, heavily borrowed venture this protection of personal assets is a decisive advantage over sole trader status. Limited liability does not, however, remove duties to keep records, pay tax or obey the law.