1.2 Business ownership forms

Question 1

Advantages of being a sole trader.

Answer 1

• Keep all profits
• Makes all decisions and has full control over business.

Question 2

Disadvantages of being a sole trader.

Answer 2

• Unlimited liability (responsible for all the business’ debts).
• Lack of expertise in certain areas, e.g. finance, can lead to bad decision making.
• High levels of stress due to managing the business solo can lead to bad decisions being made.
• Limited sources of finance since banks are less likely to loan, shareholders are not likely to invest and shares can’t be sold.

Question 3

Advantages of being in a partnership.

Answer 3

• Different expertise from partners may lead to better decision making.
• Shared responsibility may lower levels of stress and increase quality of work.
• All partners can contribute to bringing in their own source of finance, e.g. retained profits, personal finance, loans from friends/family.

Question 4

Disadvantages of being in a partnership.

Answer 4

• Profits shared between partners.
• Unlimited liability (all responsible for all business’ debts).
• Disputes can delay decision making and cause conflict.
• Shared responsibility means all partners are accountable for each other’s productivity and bad decision making.
• Limited sources of finance since banks are less likely to loan, shareholders are not likely to invest and shares can’t be sold.

Question 5

Advantages of owning a private limited company (ltd.)

Answer 5

• Profits only shared to shareholders in dividends.
• Limited liability (set limit on responsibility of business’ debts).
• All shareholders must agree before selling shares and new shareholders must be invited, preventing loss of control.
• Range of sources of finance since they are seen as more credible to banks, more reliable to shareholders, and can sell shares for equity finance.

Question 6

Disadvantages of owning a private limited company.

Answer 6

• High initial set up costs and time consuming.
• Percentage of profits shared in dividends to shareholders.
• Divorce of ownership and control between managers and owners.
• Annual accounts must be published so their activities, e.g. financial, and strategies are accessible to competitors.

Question 7

Advantages of owning a public limited company (plc.)

Answer 7

• Limited liability (set limit on responsibility of business’ debts).
• Range of sources of finance since they are seen as more credible to banks, more reliable to shareholders, and can sell shares on stock exchange.

Question 8

Disadvantages of owning a public limited company (plc.)

Answer 8

• Distribute profits through dividends to all shareholders.
• Risk of takeover by companies who bulk-buy shares.
• Annual accounts must be published so their activities, e.g. financial, and strategies are accessible to competitors.
• Divorce of ownership and control between managers and owners can lead to more complex company policies and more difficult decision making.