1. Understanding Business Flashcards
What is a sole trader?
-an individual who owns and runs the business
What is a partnership?
-a number of individuals between 2-20 working together in business and sharing profits
What is a limited liability partnership?
-number of individuals working together which has been incorporated as a separate legal entity
What is a private limited company?
-separate legal entity
-shares are not traded on stock exchange
What is a public limited company?
-separate legal entity
-shares are traded on stock exchange
What is a not-for profit organisation?
-charities and public sector organisations
-the money is used to achieve objectives
What are key characteristics of a sole trader?
-owner is independent
-all profits belong to them
-easy to set up
-owner has unlimited liability
-can invest personal capital
-hard to take holiday
What are the 2 financial statements of a sole trader?
-statement of P&L
-statement of FP
-produced annually at the financial year end
-don’t need to make annual returns to companies house
What are sole trader responsible for to HMRC?
-annual income tax returns
-stating the profit of the business
-if registered for VAT = quarterly or annual VAT returns
What are key characteristics of partnerships?
-all partners contribute capital
-profits are shared in accordance to agreement
-each partner is liable for debts of the WHOLE business
-decisions make take longer
-partners may specialise in particular areas
-loss of a partner may affect the running of the business
What are the financial statements of a partnership?
-statement of P&L
-statement of FP
-don’t need to make annual returns to companies house
What are partnerships responsible to HMRC for?
-if registered for VAT = quarterly or annual VAT return
-each partner is responsible to HMRC for their annual income tax returns (stating their share of profit in partnership)
What is included in a partnership agreement?
-division of profits between partners
-partners salaries/commission
-whether interest it to be allowed on partners capital + the rate
-whether interest it to be charged on partners drawings + the rate
What is goodwill?
-the difference between the value of a business as a whole, and the net value of its separate assets and liabilities
How is an LLP set up?
-set up through legal incorporation
-requires certain documents to be sent to Registra of companies
-advisable to have a Members agreement
-must have 2 or more ‘designated members’
What are the financial statements of an LLP?
-statement of P&L
-statement of FP
-supporting notes to financial statements
-auditors report
What is the difference between an LLP and limited partnership?
-a limited partnership must appoint at least one general partner and one limited partner
What is a general partner?
-has unlimited liability
-responsible for the day-to-day running of the business
What is a limited partner?
-often formed for projects that will last for a short period of time
-predominately providing investment for the project in return for a share of the returns
A company may become a PLC if it has:
- more than £50,000 of issued share capital
- at least 2 shareholders
- at least 2 directors
A company may be a Ltd if it has:
- no minimum requirement for issued share capital
- at least 1 shareholder
- at least 1 director (can be the shareholder too)
How do Ltd companies incorporate?
-by registering under the Companies Act 2006
-submit documents to Registrar of Companies
What must Ltd companies annual accounts comprise of?
-statement of P&L
-statement of FP
-supporting notes
-directors report
-auditors report
What are 5 advantages of incorporation?
- liability for members and shareholders is limited to the amount they have invested
- continue existence of the business as a separate legal entity
- enhancement of credibility
- easier access to finance
- transfer of ownership may be easier
What are 3 disadvantages of incorporation?
- more complex requirements of setting up + additional costs
- info filed to companies house is public
- business finances must be kept separate from those of the owners
What are public sectors?
-provide services to the UK
-owned by the central and local government
-funded by taxes
What are charities?
-set up to provide charitable activities within the scope of the charity
-income from donations and funding
What are the main rules governing charities set out in?
-Charities Act 2011
-Charity Commission
-Statement of Recommended Practice Accounting and Reporting by Charities or FRS 102
What rules must charities follow?
- follow charity law
- purpose must be for public benefit
- governed by a trust deed
- independent of other organisations
- register with the Charity Commission
What is a trust deed?
-sets out the name of the charity, its objects and powers
-deals with appointment of trustees
-how meeting are to be run
-required financial statements
What must charities financial statements comprise of?
-statement of financial activities
-statement of FP
-cashflow statement
-supporting notes
-trustees annual report
-auditors report
What are common features of business organisations?
- structure
- common objectives and team working
- co-operation
- responsibility, authority and division of work
What is intangibility?
-a service doesn’t provide a physical product
What is inseparability?
-a service cannot be separated from it’s consumption by customer
What is perishability?
-any unused service cannot be stored for future use
What is variability?
-a service will be tailored to the needs of an individual customer
What are 4 funding sources?
- borrowing
- new capital
- retained profit
- working capital
What is new capital?
-can be introduced to a business by issuing further share capital
-private = issued to shareholders or offered to a new investor
-public = share issue on stock exchange
What is a disadvantage of new capital?
-it will dilute the ownership of existing shareholders
What is an advantage of new capital?
-won’t have to repay interest
-not required to repay the shareholders if they don’t wish to invest in the business
-shareholders will need to sell shares privately
What is retained profit?
-a business may wish to retain some of its profits to reinvest in the business
-can be a less expensive way of investing in business growth
What is working capital?
-the difference between a business’s current assets and current liabilities
What is a stakeholder?
-a person or organisation that has interest in another organisation
What will the customers be interested in?
-quality of products
-reasonable price
-statements showing how much they owe
What will suppliers be interested in?
-provide invoices and statements
-expect to be paid on time
What are finance providers interested in?
-expect directors to show them the financial statements of the business before providing funds
What are owners/shareholders interested in?
-how much profit the business makes
What will employees be interested in?
-how well business is performing
-expect reasonable training
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What is a stakeholders attitude to risk?
-the level of risk stakeholders are willing to to accept and what they will do if they feel that the level of risk is too high
What is risk averse?
-will accept a lower return or pay higher prices to avoid risk
What is risk seeking?
-actively seeking out riskier options to increase the likelihood of a higher return
What is a risk appetite?
-the level of risk they are prepared to accept to achieve their objectives
What is a risk tolerance?
-how much risk they are able to withstand
What is a risk threshold?
-the level up to which risk is acceptable
