1. 1.Two disadvantages of partnerships.
- Decision process is slower/harder – you have to stand behind the decisions that your partners does
- The profit is divided by the number of partners
- If your partner is in dept, you will be in dept
o IN PARTNERSHIP NO LIMITED LIABILITY
o ‘LIMITED LIABILITY PARTNERSHIP’ they made something like this.
+ Partners need to have COMPLEMENTARY SKILL SETS (they should have different skills, for instance one can be good at marketing/advertisement, the other one should be good at finance – they should complete each other)
2. 2. What is limited liability?
- It is a principle - protection to the investor if the business collapses – if your business collapses, you pay the money left in the company, not the whole loan, if you spent it you cannot give it, they cannot take your personal assets (unless you agree that they can)
Lender: he lends you the money, after a while he takes the money back; there is an interest amount as well. So you have to give the money back to him. Doesn’t own a part of the company (difference between shareholder and lender)
Shareholder: owns a part of the company rather than simply lending money
PE funds (Private – Equity (capital)) - funds that are basically contributed by people who have a huge amount of money – they look for ideas
Business angel: only interested in you business
Venture Capitalist: usually part of PE fund – he is considered about finding good companies to invest in
SME (Small Medium Enterprise) –
4. Two reasons why a public sector is needed
-The government wants to keep sources such as minerals and the untrustable things such as defense under control
-The private sector might lack capital so they want to control this
Out sourcing: For instance, Levis jeans are manufactured in China instead of USA. Denial of responsibility – make them do your job
-The public sector is able to provide goods at a lower cost
Private investors have no reason to provide public good because of the free rider (using something and not paying for it is a free riding problem) problem.
Education, schools, museums, health services, and libraries: MERIT GOOD – everybody need them but everybody cannot pay them – generally considered to be good for everybody – but the private sector cannot make it for everybody – so the public sector provide such services –education- if they didn’t most of the people wouldn’t be educated, because they don’t have enough money
So here is my mixed notes. I took these notes while we were reviewing the quiz. Out of these notes, 'Limited Liability' made me think for a while. It is obvious that it is an opportunity for the investors of the business. However what made me think is, the lenders does not have any advantages out of this 'Limited Liability'. Due to this Limited Liability, the investors are paying only the money left in the business when it collapses. So what happens to the lenders? They are not able to get the whole money they have invested if the business collapses. If they do not make a deal with the investors, they will be in loss. So why would a lender lend money to a company while knowing that there isn't any guarantee to get the money back? Of course there is the positive parts of this as well. If the business is successful, they will get the money back. This is obvious, but doesn't this limited liability make the lenders lend money more difficult. They have to think twice before lending money to a business because it can be a huge risk.
On the other hand, I don't believe that the lenders should be able to get the personal assets of the investors, but I think a middle way should be found.
