What does limited liability mean for a company's shareholders?

Their possible loss is capped at what they invested

They cannot sell their shares for a fixed period

They are guaranteed a dividend each year

They are restricted to one vote each

A sole trader differs from a limited company in that the owner does what?

Bears personal responsibility for the business's debts

Must employ at least one other person

What is the usual distinction between a merger and an acquisition?

A merger combines two firms into one, while an acquisition is one firm buying another

A merger is paid in cash and an acquisition in shares

A merger needs regulatory approval and an acquisition does not

A merger is temporary and an acquisition permanent

What is due diligence?

A detailed investigation of a business before a deal completes

A legal duty to pay suppliers on time

The annual report sent to shareholders

The minimum capital a company must hold

A holding company is one that mainly does what?

Owns shares in other companies rather than trading itself

Stores goods in warehouses for retailers

Keeps cash reserves on behalf of a bank

A cooperative is owned by whom?

Its members, usually its workers or its customers

What distinguishes a non-profit organisation from an ordinary business?

Any surplus goes back into its purpose rather than to owners

It is not permitted to earn income

What are a company's articles of association?

The internal rules governing how it is run

The contract with its first customer

Its registration with the tax authority

The inventory of its physical assets

In corporate governance, what is the agency problem?

Managers may act in their own interests rather than those of the owners

Two agencies compete for the same client

A firm becomes dependent on temporary staff

Advertising agencies overcharge their clients

What is a subsidiary?

A company controlled by another company

A payment made by a government to support an industry

A discount offered to regular customers

A branch office with no separate legal identity

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Business & Enterprise Medium ⚡ 10 Questions ⏱️ ~7 Mins +100 XP

The Shape of a Company

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Before a business sells anything it has to be something. These are the legal shapes it can take, and what each one means.

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~7m

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Medium

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About this topic

The single most consequential idea in business organisation is also the dullest sounding. Limited liability caps an investor's loss at what they put in, which means you can buy a stake in a company run by strangers on the other side of the world without risking your house. Without it, raising money from people who are not involved in running the business is close to impossible, and the modern corporation does not exist. Everything else follows from decisions about ownership and control. A sole trader is the business, debts and all. A cooperative gives each member one vote whatever they invested. A holding company owns other companies and trades in nothing itself, which keeps their risks apart. And once ownership is separated from management, a permanent problem appears: the people running the business are not the people who own it. Boards, audits and share options are all attempts to close that gap.

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The Shape of a Company: all 10 questions and answers

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1What does limited liability mean for a company's shareholders?
- A They cannot sell their shares for a fixed period
- B They are guaranteed a dividend each year
- C They are restricted to one vote each
- D Their possible loss is capped at what they invested Correct
Answer: D. Their possible loss is capped at what they invested

Why: Debts beyond that point fall on the company itself rather than on the owners personally. The principle is what made it practical to raise money from investors who take no part in running the business.
2A sole trader differs from a limited company in that the owner does what?
- A Pays no tax on the profits
- B Cannot register a trading name
- C Bears personal responsibility for the business's debts Correct
- D Must employ at least one other person
Answer: C. Bears personal responsibility for the business's debts

Why: It is the simplest structure to set up and the most exposed if things go wrong. Many small businesses incorporate once the sums involved grow large enough to matter.
3What is the usual distinction between a merger and an acquisition?
- A A merger is temporary and an acquisition permanent
- B A merger combines two firms into one, while an acquisition is one firm buying another Correct
- C A merger is paid in cash and an acquisition in shares
- D A merger needs regulatory approval and an acquisition does not
Answer: B. A merger combines two firms into one, while an acquisition is one firm buying another

Why: The difference is often more presentational than legal, since most so-called mergers have a dominant partner. Either way, large deals normally need competition clearance before they can complete.
4What is due diligence?
- A A detailed investigation of a business before a deal completes Correct
- B A legal duty to pay suppliers on time
- C The annual report sent to shareholders
- D The minimum capital a company must hold
Answer: A. A detailed investigation of a business before a deal completes

Why: Buyers go through contracts, accounts, staff and outstanding liabilities. Finding a problem is more often used to renegotiate the price than to abandon the deal.
5A holding company is one that mainly does what?
- A Stores goods in warehouses for retailers
- B Keeps cash reserves on behalf of a bank
- C Holds customer deposits
- D Owns shares in other companies rather than trading itself Correct
Answer: D. Owns shares in other companies rather than trading itself

Why: Grouping subsidiaries under a single owner keeps their risks separate from one another. It also makes selling off one part of the group considerably simpler.
6A cooperative is owned by whom?
- A The local authority
- B Its largest supplier
- C Its members, usually its workers or its customers Correct
- D A single founding family
Answer: C. Its members, usually its workers or its customers

Why: Each member typically has one vote regardless of how much money they put in. The Rochdale weavers set out the modern principles in 1844 and they are still the basis of the movement.
7What distinguishes a non-profit organisation from an ordinary business?
- A Its wages are capped by law
- B Any surplus goes back into its purpose rather than to owners Correct
- C It is not permitted to earn income
- D It cannot employ paid staff
Answer: B. Any surplus goes back into its purpose rather than to owners

Why: Many run substantial commercial operations and compete directly with businesses. What they cannot do is distribute the surplus to shareholders.
8What are a company's articles of association?
- A The internal rules governing how it is run Correct
- B The contract with its first customer
- C Its registration with the tax authority
- D The inventory of its physical assets
Answer: A. The internal rules governing how it is run

Why: They cover share rights, the powers of directors and how meetings are called. Most companies adopt a standard set and amend only the parts they need to.
9In corporate governance, what is the agency problem?
- A Two agencies compete for the same client
- B A firm becomes dependent on temporary staff
- C Advertising agencies overcharge their clients
- D Managers may act in their own interests rather than those of the owners Correct
Answer: D. Managers may act in their own interests rather than those of the owners

Why: It arises whenever ownership and day-to-day control are separated. Boards, external audit and share-based pay are all attempts to narrow the gap.
10What is a subsidiary?
- A A discount offered to regular customers
- B A branch office with no separate legal identity
- C A company controlled by another company Correct
- D A payment made by a government to support an industry
Answer: C. A company controlled by another company

Why: Control normally means holding more than half of the voting shares. A subsidiary keeps its own legal identity, which is exactly what separates it from a branch.

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