Studied by 0 peopleWhat is a sole trader?
A business owned by just one person
Useful for people who are setting up new business
Do not need much capital to get business running
Will be dealing mainly with the public
Advantages of sole traders?
Easy to set up, do not require a lot of money to set up | |
They are their own boss, has the freedom to choose their own holidays, work hours, prices, who to employ | |
Close relationship with customers | |
Does not have to share profits | |
Does not have to give information about the business | |
Lesser legal restrictions |
Disadvantages of sole traders?
Capital is usually provided by owner, hard to get capital to expand firm | |
They have unlimited liability (responsible for any debts of the business, bank can take away possessions to pay back) | |
Business is likely to remain small | |
No one to discuss business matters with | |
They are unincorporated (business has same identity as the owner). So, business ends when owner dies | |
What is a partnership?
A business in which 2 to 20 people agree to own it. Bigger than sole traders.
Useful for people who want to form a business but don’t want the legal complications
Industries such as medicine or law where you are not allowed to form a company
Partners that know each other very well
Advantages of a partnership?
Advantages | |
|---|---|
Easy to set up, do not require a lot of money | |
More capital invested (more expansion) | |
Partners are motivated because any losses are shared by the partners | |
Responsibilities are shared (focused on different parts of business) |
Disadvantages of a partnership?
Disadvantages | |
|---|---|
Capital is usually provided by partners | |
Partners have unlimited liability | |
Partners can disagree on decisions. If one of the partners is inefficient, they all lose money | |
Contents of a partnership agreement?
Amount of capital invested by all partners
Tasks to be done by each partner
The way profits are shared out
How long partnership will last
Arrangements for absence, retirement and how partners could be let known
An LTD is different from the other because it can sell shares and it is an incorporated business.
Company must be owned by at least 2 shareholders
A shareholder buys shares of an LTD company which represent part ownership of the company
Dividend is the amount of profit each shareholder gets
Shares are sold privately to friends and family
Has separate identity from owners, incorporated, so company accounts are separate from the owners’
Must have: Articles of Association and Memorandum of Association
Article and Memorandum of Association
Article of Association – must contain the RULES in which the company will be managed. Contains:
Rules for shareholder meetings
List of directors and their jobs
Voting rights of shareholders
Details of how accounts are recorded
Memorandum of Association – must contain important information about the company:
Company name, address
What the business does
Number of shares to be sold
Advantages and disadvantages of a private limited company.
Advantages | Disadvantages |
|---|---|
Shares can be sold to lots of people. More capital to expand | Difficult to set up (legal formalities). |
Owners are able to keep control of company as long as they don’t sell too many shares | Shares are difficult transfer. Requires other shareholders to agree |
All shareholders have limited liability (bank can only take amount of money invested) | Accounts are less secret than other forms of business |
Company continues after a shareholder dies | Company cannot offer it shares to the public |
Private Limited Companies are useful for family businesses or businesses/partnerships where owners want to expand more (as you can sell shares)
A PLC is similar to LTD only the shares can be sold to the public. It is the biggest type of business.
Shareholders of PLCs may attend an Annual General Meeting where they may vote for the board directors
Advantages and disavantages of a public limited company.
Advantages (in addition to those in LTDs) | Disadvantages |
|---|---|
Opportunity to raise high capital sums | Difficult to set up (legal formalities) & accounts are even more public |
No restriction of buying, selling or transferring shares | Danger of business being taken over due to public shares |
Selling shares to public is expensive |
DON’T GET CONFUSED, Public Limited Companies are NOT in the PUBLIC sector, they are in PRIVATE sector
What is a franchise?
A franchise is an agreement of a business based upon an existing brand/business
The franchisor is the main business/brand
The franchisee is the individual to start up franchise
In a franchise, the franchisor allows the franchisee to trade under its name and (sell) its products for a fee
The franchisee pays an original fee to franchisor and a percentage of its profit for the privilege
Franchisor provides support, such as:
Advertising
Legal advice
Employee training
Financial advice
Franchise agreements last 5 – 20 years, if franchisee cancels the agreement early there may be large fines
Advantages and disadvantages to a franchisor.
Advantages
Rapid, low cost method of business expansion
Generates income in the form of franchise fees and royalties
Franchisee can introduce new concepts and ideas
Franchisee runs operations
Disadvantages
The profit is kept by the franchisee
Loss of control over the running of the business
If one fails, it ruins the whole brand image
Raw materials and training is expensive
Advantages and disadvantages to a franchisee.
Advantages
It is an already established brand, so chances of failure are lower
Technical and managerial support
Franchisor will supply raw materials and products
Disadvantages
The cost of setting up the business
No control over the business, has to follow the rules
Profits have to be shared
Royalty and franchise fees
Need to advertise/promote themselves
What is a joint venture?
A joint venture is when two or more businesses start a project together sharing capital risks, and profits
Advantages and disadvantages of a joint venture.
Advantages | Disadvantages |
|---|---|
Costs are shared, good for expensive projects | Profits have to be shared if project is successful |
Shared knowledge of two businesses | Might have disagreements over important decisions |
Risks are shared | Different methods of running business |
Risk - the uncertainty of profits or danger of loss, events that could cause business to fail
Ownership – who owns the business (partnership = partners, LTDs and PLCs = the shareholders)
The people with risk are usually the owners
Liability – how much the shareholders of a company are liable for the debts in the business
Limited Liability – liability of shareholders is limited to the amount of money they invested (PLC & LTD)
Unlimited liability – owners of business are held responsible for all the debts of the business (not just their investment) (Sole trader & partnerships)
Advantages and disadvantages of public sector.
Usually these businesses have been nationalized (used to be private sector but government bought it)
Capital comes from taxes, by tax payer
Advantages | Disadvantages |
|---|---|
Reduces wastage of resources (if a monopoly) | Low efficiency due to lack of competition |
Allows access of essentials to everyone | Easily manipulated by the government to exploit citizens |
Continued even if in losses | Not flexible as profit is not a main aim |
Keeps in mind social costs of decisions (non-profitable) | Will have to be subsidized if in losses, opportunity cost |
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