1.2 - Understanding different business forms Flashcards
Advantages of a Sole Trader.
The easiest type of business to set up.
Gets to be their own boss.
The sole trader decides what to do with the profit.
Easy to change the legal structure if circumstances change.
Disadvantages of Sole Trader.
Unlimited liability - no legal distinction between personal assets and company assets.
Hard to raise finance - Banks often see Sole Traders as riskier.
All decision making responsibility is yours.
Harder to retain good employees as they arent necessarily given a share of the profits.
Advantages of a Private Limited Company
The key advantage over sole traders and partnerships is that shareholders have limited liability.
The fact that ownership is restricted means that all shareholders must agree to sell shares. This means that the owners retain (keep) a lot of control over how the business is managed.
It is normally easier for a limited company to get a loan than it is for partnerships, as a company is normally seen as less risky. This should increase a company’s access to finance.
Disadvantages of Private Limited Companies
Finance is needed to incorporate a business. There is an upfront fee as well as costs associated with paperwork.
This means that it may not be possible for smaller firms (or brand new firms).
Unlike sole traders and partnerships, the company is legally obliged to publish their accounts each year and competitors may use these to become more competitive.
Advantages of a Public Limited Company
Selling shares on a stock exchange allows companies to raise money for investment, which enables the company to grow faster or bigger.
It is much easier for companies to raise capital (money) from banks if they are public limited companies because they present less of a risk (given the number and size of investors).
Shareholders have limited liability because the company is incorporated.
Disadvantages of a Public Limited Company.
Owners often have very little say over how the business is run. This means that it can be hard to agree on how the business is run.
Anyone can take over the company if they are able to buy enough shares. When shareholders own more than half the shares, then they will have control over the company.
The company’s accounts must be made public. This means that competitors can see how well the company is doing.
Name 3 types of Non-Profit Organisations.
- Social enterprise
- Unincorporated associations
- Charities
What is franchising?
Franchising is where a business gives someone the right to sell its products and use its trademarks. The ‘franchisee’ usually pays the business an upfront fee and a percentage of the profits.
Advantages of Franchising
The business can expand without needing large amounts of investment.
The firm does not incur the costs involved with opening new stores.
The business also does not have to be concerned about some of the risks of becoming a larger corporation, for example, diseconomies of scale (which may be caused by the growth from opening and operating new stores themselves).
Franchising increases brand awareness of the firm’s products or services.
Disadvantages of Franchising.
A disadvantage of franchising is that the franchiser does not have complete control over how they operate.
If a franchise is run badly, then a single franchise or store can negatively affect the brand image.
What did Keating (2013) write about?
Gina Keating’s book Netflixed explains that Blockbuster struggled to move into DVD by mail and online streaming because of its franchisees.
The business model of consumers going into stores was dying. Blockbuster needed to centralise the technology to ship DVDs in the post, but this would compete with the franchisees’ businesses, so many resisted the change. This delayed Blockbuster and who’ve you heard of now… Netflix or Blockbuster?
What is market capitalisation, and how is it calculated?
Market capitalisation is one way of valuing a business and can be calculated by multiplying the number of shares issued by the current market price of one share.
What is an AGM?
Shareholders have a right to attend a business’ Annual General Meeting (AGM) which is where votes can be made on key decisions affecting the business, including appointing a Board of Directors.
