1. Types Of Business Ownership ✅ Flashcards
What are the 4 main types of business ownership?
+ Sole trader
+ Partnership
+ Private Limited Company (Ltd)
+ Public Limited Company (PLC)
State the definition of a sole trader.
A sole trader is a business which is fully owned by one person who has complete control over how the firm is run.
What are the 4 advantages of a Sole Trader, make sure to explain your answer?
+ Low start-up costs - Setting up as a sole trader is a relatively straightforward process when compared to other forms of business ownership.
+ All profits are kept - Since a sole trader is fully owned by one person that person gets to keep all profits made by the business.
+ Better control - Running a business as a sole trader means that you are able to make all decisions by yourself. This means that decisions can be made much faster.
+ Financial privacy - Sole traders don’t have to publish their financial affairs meaning business dealings can be kept private.
What are the 6 disadvantages of a sole trader, make sure to explain your answer?
Unlimited liability - under UK law sole traders have no separate legal existence to that of their owner. This means that if a sole trader business doesn’t have enough money to pay its debts, the owner will have to use their own money to cover the debts.
Lack of Capital - Sole traders often find it difficult to find the money to start or expand their business. The amount of start up capital is limited to the amount the sole trader can raise through their own savings or from borrowing. Moreover, banks may be reluctant to lend sole traders money as they believe that they may be unable to pay them back.
Long hours - Sole traders may work extremely long hours as they are often the only one who works for the company.
Lack of Continuity - If the owner of a sole trader becomes ill their business will suffer as a result and if they die the business may have to be wound up (shut down).
Lack of Expertise - The success of a sole trader depends on the owner’s skills as they must be skilled in all aspects of their business. If they are not able to carry out all roles effectively this could lead to the failure of the business.
Limited economies of Scale - Because most sole traders are small firms, they are not able to buy materials in bulk, unlike larger firms. This means that owners often end up paying more for their materials as they will not be offered discounts for buying in bulk.
What is a partnership?
A partnership is when two more people combine to form a business. The partners share the responsibility of running the business and therefore any decisions relating to the business should be taken with the agreement of all partners. Under UK law a general partnership must have a minimum of 2 and a maximum of 20.
What is a Deed of Partnership?
When setting up a partnership it is recommended that a partnership agreement or deed of partnership is drawn up to legalise the partnership. This deed helps to clear up any disputes which may arise, such as profit, liabilities or each individual’s role and responsibility.
What are the recommended terms of the Deed of Partnership? (x6)
+ Trading name and function of the business
+ The amount of capital each partner will invest
+ Profit ratio
+ Seniority and control over the business
+ The rules in admitting new partners
+ The rules on ending the partnership.
What are the advantages of a partnership, explaining your answer? (x6)
Low start up costs - setting up partnerships are a relatively straightforward process, as there are very few legal formalities to complete meaning that it will be relatively cheap to set up the partnership.
Shared workload - When compared to a sole trader, partnerships should have a lower workload as the work can be shared among partners. This will also mean that the partnership should easily be able to cope with a partner becoming ill or taking a holiday.
Specialisation - in a partnership each partner can specialise in the part of the company’s operations where they are best suited.
Raising capital - partnerships will typically raise more capital than sole traders as there will be more owners to contribute capital to the company.
Financial privacy - like sole traders, partnerships don’t have to publish financial affairs meaning that their business dealings can be kept private.
More effective decision making - having a partner or a number of partners allows for more effective decision making since each partner will bring different views and ideas to the business.
What are the disadvantages of a partnership? (x5)
Loss of autonomy - running a partnership means that partners will have to consult with each other before making decisions. This can slow down the decision making process and reduce the likely success of the firm.
Conflict between partners - running a business with a partner or partners can be very stressful, particularly if the partners have different views on how the business should be run.
Unlimited liability - like sole traders, partnerships are not a separate legal entity to that of their owners. This means that the partners will be liable for their company’s debts.
Lack of continuity - problems arise in partnerships upon the death and even divorce of one of the partners. If 2 partners divorce, the partnership will normally dissolve unless a partner buys them out.
Lack of capital - even though partnerships can typically raise more capital than sole traders, the amount of capital they can raise is still limited as the number of partners is limited. Compared to ltds and PLCs the typical amount of capital in a partnership is relatively small.
What is a limited company?
Limited companies are very different from sole traders and partnerships as limited companies are a separate legal entity from their owners. This means that the company will raise finance in its own right and any debt which is gained belongs to the company and not the owners.
What 2 articles are needed to set up a limited company in the UK?
The memorandum of association
The articles of association.
Explain the memorandum of association.
It includes details such as the official name of the company, the type of company (PLC or LTD), the work and objectives of the business, the amount of initial share capital and the names of the original shareholders.
Explain the articles of association.
They are regulations that cover areas such as the different voting rights associated with different types of share, the rules of board meetings, how profits will be divided and the duties of directors.
What is an Ltd?
An Ltd is a private limited company. They are incorporated and therefore are a separate legal entity from their owners. Shares in a private limited company cannot be bought by members of the general public. Those who hold shares in an Ltd can only sell their shares privately and with the consent of the other shareholders.
What are the advantages of a private limited company?
Raising capital - because their is no limits what the ukeb is f shareholder a private limited company. Can hevr it will be abelt to raise more capital than a partnership ora s soletraser. Additionallt, Ltds are usually larger thans ole readers or partnerships and are there normally regarded as less risky, meaning that they typically find it easier to get.loand grombanks.
