1. Osborne - Understanding Businesses Flashcards
Understanding Businesses (CH1)
6 Types of Business Organisations
• Sole trader
• Partnership
• Limited Liability Partnership (LLP) and Limited Partnership
• Private Limited Company
• Public Limited Company
• Not-for-Profit Organisations
Understanding Businesses (CH1)
What is a sole trader?
- A person who runs their own business.
- Generally a small business.
- Owners have limited amounts of capital.
Understanding Businesses (CH1)
Sole Trader Benefits
- Owner has independence.
- Fewer, if any, employees.
- Can provide a personal service.
- Supervision by the owner available at all times.
- Easy to establish legally.
- No definitive format for financial statements.
Understanding Businesses (CH1)
Sole Trader Drawbacks
- Owner has unlimited liability for the debts of the business.
- Expansion is limited because it can only be achieved by the owner reinvesting profits, or by borrowing from a lender (e.g. bank).
- Working long hours, lack of holidays
- If the owner should become ill the work of the business will either slow down or stop altogether.
Understanding Businesses (CH1)
Traits of a Partnership (Unlimited Liability)
- Normally consist of between 2 and 20 partners.
- It can be set-up a new business or a logical growth of a sole trader.
- Financial Statements of a Partnership: SoPL and SoFP
- Rules are either set out in the Partnership Act 1890 or in a partnership agreement (oral or written) between the partners.
Understanding Businesses (CH1)
What does the Partnership Agreement include?
Partnership Agreement usually covers:
- Division of profits / losses between partners.
- Salaries / Commission.
- Interest allowed on partners’ capital and at what rate.
- Interest to be charged on partners’ drawings and at what rate.
Understanding Businesses (CH1)
What is Goodwill?
Goodwill is the difference between the value of a business as a whole, and the net value of Its separate assets and liabilities.
Understanding Businesses (CH1)
Factors that contribute to Goodwill
- Loyal customer base
- Positive reputation
- Highly Skilled workforce
- Successful / Unique product
Understanding Businesses (CH1)
Benefits of Partnership (Unlimited Liability)
- Partnerships are cheap and easy to set up.
- Possibility of increased capital.
- Individual partners may be able to specialise in particular areas of the business.
- With more people running the business, there is cover for illness and holidays.
- Similar type of financial statements as a sole trader.
Understanding Businesses (CH1)
Drawback of Partnership (Unlimited Liability)
- Decisions may take longer because other partners may need to be consulted.
- Disagreements among the partners.
- Each partner is liable in law for the dealings and business debts of the whole business (unless it is a ‘limited liability partnership’ set up under the Limited Liability Partnerships Act 2000).
- The retirement or death of one partner may adversely affect the running of the business.
Understanding Businesses (CH1)
What does incorporated mean?
A company formed in a legal corporation separated from its owners.
It has 2 main types: Limited Liability Partnerships / Limited Partnerships and Ltd Companies.
Understanding Businesses (CH1)
Two main types of incorporated company
- Limited Liability Partnerships / Limited Partnerships.
- Ltd Companies.
Understanding Businesses (CH1)
Benefits of incorporated status
- Limited liability for owners (members - LLP & shareholders - limited company) - limit to the amount they have invested.
- Continuing existence of the business as a separate legal entity from its owners
- Access to finance/capital easier
- Transfer of ownership generally easier e.g. sale of shares
Understanding Businesses (CH1)
Drawbacks of incorporated status
- More complex requirements for setting up the business and higher costs for compliance (record keeping, annual returns etc.)
- Statutory financial statements required and compliance with accounting standards.
- Annual Accounts and Confirmation Statement must be submitted to Companies House where they can be viewed by the public.
Understanding Businesses (CH1)
Traits of Limited Liability Partnerships
- Formed under the Limited Liability Partnership Act 2000.
- Separate legal entity.
- Created and incorporated by registration at Companies House.
- Must be at least 2 members but no upper limit.
- At least two of the members must be named as ‘designated members’, who accept responsibility for compliance purposes, such as sending information to Companies House.
- Advisable but not legally required for LLPs to have a Members Agreement.
- Similar requirements as a limited company such as registration, financial statements (FRS 102) and auditing of its accounts.
- Confirmation Statement and Annual Accounts must be filed at Companies House by the designated members of the LLP, where it is available for public inspection.
Understanding Businesses (CH1)
Limited Partnerships
Limited Partnership has at least one general partner and one limiled partner.
Limited Partners:
- Have limited liability.
- Do not take part in mangerial decisions.
General Partners:
- Have unlimited liability.
- Responsible for the day-to-day running.
- Formed for short-term projects e.g. a building project.
