1.2 Understanding different business forms Flashcards
What is a soletrader
- 1 exclusive owner
- have employees
- entitled to all the profits (after tax)
Advantages of soletrader
- easiest set up
- own boss
- decides what to do with profit
- easy to change legal structure if circumstances change
Disadvantages of soletrader
- unlimited liability = no legal distinction between the sole trader’s assets and business’ assets
- hard to raise finance = banks see them as riskier
- own responsibility = sharing decision making can improve performance
- harder to keep good employees = not given a share of profits
What does Ltd mean
Private Limited Company
What is an Ltd
Companies where ownership of shares is restricted. For the company to sell shares, all the current shareholders must agree to sell them.
Advantages of Ltd
- limited liability
- restricted ownership = shareholders must agree to sell shares, owners retain (keep) a lot of control over how the business is managed
- easier for an Ltd to get a loan as it’s seen less risky. This (should) increase a company’s access to finance
Disadvantages of Ltd
- Finance need to incorporate a business = upfront fee as well as costs associated with paperwork = may not be possible for smaller firms (or brand new firms)
- Legally obliged to publish their accounts each year and competitors may use these to become more competitive
What does PLC mean
Public Limited Company
What is a PLC
A company that sells shares on stock exchange ( anybody 18+ can buy shares - often through brokers )
When a firms likely to become a PLC and an example
The desire to expand because selling shares on the stock exchange allows them to raise finance for investment.
- e.g = 2017, Snapchat went through this process (flotation)
Advantages of PLC
- selling shares on stock exchange = raise money for investment so company can grow faster or bigger
- easier to raise capital from banks if they are PLCs due to presenting less of a risk (number and size of investors)
- Limited liability because the company is incorporated
Disadvantages of PLC
- owners have little say over running of business - hard to agree on how it runs
- anyone can take over the company if they buy 51+% share, then they have control
- account public = competitors can see the success / failure
What is a Not-For-Profit organisation?
Any profit made by these organisations is reinvested (put back) in the business. Any profit cannot be kept by the owners.
Types of Not-For-Profit organisations
- Unincorporated association
- Charities
- Social enterprise
Features of an Unincorporated association and example
- unlimited liability = no profit and are legally responsible for all the debt
- e.g Oxfam
Features of a Charity and example(s)
Getting charitable status lets a business to get tax relief and lets it apply for certain grants. For a business to get a charitable status, they must follow rules and regulations.
- e.g Save the Children
Features of a social enterprise and examples
- Similar to for-profit business
- they make a surplus through selling goods or services. This profit is reinvested to support the social enterprise’s aim
- e.g Big Issue or TOMs
What is franchising
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 % of the profits.
Example of franchising
KFC, part of the TacoBell Group.
Many KFC’s all over the world are not owned by KFC but instead owned by individuals who pay a fee and % of the profits to KFC. This lets them use the KFC brand name and the “original recipe”
Advantages of franchising
- Can expand without needing large investment = doesn’t incur costs involved with opening new stores
- not to be concerned about some of the risks of becoming a larger corporation, e.g, diseconomies of scale (which may be caused by the growth from opening and operating new stores themselves)
- increases brand awareness of the firm’s products or services
Disadvantages of franchising
- Franchiser doesn’t 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
Other examples of franchises
- Subway
- Krispy Kreme
- McDonald’s
What is a partnership
Two or more owners involved in the day-to-day running of the business.
What document is needed to set up a partnership
Deed of Partnership
What is included in the Deed of Partnership
- Amount capital each partner invested
- How profits / losses should be divided
- How many votes each partner has
- Rules on how to take on new partners
- How the partnership is brought to an end, how a partner leaves
Advantages of a soletrader becoming a partnership
- Increase risk across more people, more to share the burden of debt
- Partner may bring money and resources to the business
- Increased skills and ideas
- Increased credibility with potential customers and suppliers - who may see dealing with the business as less risky than trading with just a sole trader
Disadvantages of becoming a partnership
- less control for each partner
- workload disputes
-problems could arise if partners disagree over direction of business
Advantages of remaining a partnership rather than becoming an Ltd
- Costs money to set up limited company (solicitor may be needed to set up paperwork)
- Company accounts are filed so the public and competitors can view them
- May need to spend money on an auditor to check the accounts before they are filed
What are shareholders
Individuals / groups who buy shares in limited companies
Ordinary share capital definition
The amount of finance raised through selling shares to shareholders. Businesses usually use this as a source of long-term finance
Market capitalisation calculation
no. shares issued X current market price of one share
- one way of valuing a business
What is Royal Mail’s market capitalisation
£3.95 billion
Dividend definition
A proportion of a business’ profits that is given to shareholders
Advantage of a dividend for a business
Makes shareholders satisfied - won’t sell shares
Disadvantage of a dividend for a business
Profit is not spent on long-term growth which can limit the growth potential of the business
What is the benefits of shareholders to a PLC
They provide finance, though they are not routinely involved in the running of the business
Who is involved in the running of a PLC
Board of directors
Are shareholders involved in the running of an Ltd
Yes
What do shareholders have a right to attend and what is it
The business’ Annual General Meeting (AGM), where votes can be made on key decision affecting the business, including appointing a Board of Directors
Factors why shareholders may decide to invest in a business
- If share price may increase in future years = creates a return for shareholder
- Would like to receive an annual dividend
- IF they agree with a company’s aims and values and wish to be part of the company’s future journey
Factors influencing the value of shares
- Business performance = greater performance increases demand, so increases share price
- Economic performance = gives individuals confidence in the market, might increase demand for shares and increases share price
- News articles = businesses accused of scandal involvement may receive a bad reputation, decreases demand for shares so decrease in share price
Impact of changing the value of shares
Future investors are concerned about the business and this will make it more difficult for the company to raise additional finance through the sale of shares
Analyse franchising as a method of growth for a business - EXPLAIN FRANCHISING (1)
1) Franchising involves the franchisor selling a license to the franchisee, who can then own a business that used the brand of the franchisor. Many larger businesses, such as McDonald’s operates as franchises. Entrepreneurs running their own franchise of McDonald’s take on less risk because people already know & like the product, and they benefit from an established brand name and product portfolio. Franchising is often used as a method for businesses like McDonald’s for external growth.
Analyse franchising as a method of growth for a business - INCREASED REACH (2)
Allowing franchisees to open franchises allows for faster growth, both in terms of the number of stores and the number of geographic location. The business does not have to find the finance to open every store and franchisees often have to pay a large lump sum to purchase the license. Franchisees are motivated and have the drive to start and run a new business. Franchising can be a cost-effective way of reaching a wider target market and increasing sales.
Analyse franchising as a method of growth for a business - FINDING THE RIGHT FRANCHISEE (3)
However, it is important for the franchisor to find the right franchisee for the business and brand. If one franchise is run badly and a customer has a particularly negative experience, this can impact the reputation of the overall business and all franchises within this. The franchisee is restricted in terms of lots of decision (e.g the branding, uniforms, processes) and so it is important for them to be bought into the business and the culture, to ensure that the individual business is aligned to the overall business that owns the brand and trademarks.
What do franchisees usually pay the franchisor
- upfront fee
- royalties
A further disadvantage of franchising shown in the failure of Blockbuster
Reduces the potential strategic options of a business. Once you have franchisees, technology can change & your business model may have to change. Franchisees might make it harder to change
Is a sole trader incorporated?
No
