1.4 making the business effective

Question 1

sole trader

Answer 1

A sole trader is an individual owning the business on his/her own.

Most businesses in the UK are small businesses. These businesses normally operate as a sole trader e.g. hairdressers, gardeners, plumbers and electricians.

A sole trader can also employ people – but those employees do not share in the ownership of the business.

Question 2

sole trader - pros

Answer 2

• Quick and easy to set up.
• the owner makes all decisions.
• the owner keeps all profits.
• minimal paperwork required.

Question 3

sole trader - cons

Answer 3

• unlimited liability
• may not have all the skills needed to handle all areas of the business.
• making all the decisions can be stressful
• can be difficult to raise finance.
• heavy workload

Question 4

partnership

Answer 4

-A partnership is formed where a business is started and owned by more than one person.
-Common examples of partnerships are doctors, solicitors or vets.
-A legal document, called a Partnership Agreement, is always recommended and sets out how the partnership is run and how profits are divided up.

Question 5

partnership - pros

Answer 5

-Simple to form a business together
-Minimal paperwork once Partnership Agreement is set up
-Partners can provide specialist knowledge and skills
-Jobs can be shared
-Greater potential to raise finance
-Any losses will be shared

Question 6

partnership - cons

Answer 6

-Unlimited liability
-Partners have to live with decisions of others
-Decision-making can take longer
-Harder to raise finance than a company
-Short life, as if one partner leaves or dies the partnership ends
-Profits have to be shared

Question 7

limited companies

Answer 7

A company is formed when a business is set up to have a separate legal identity from its owners.
The company’s finances are separate from the personal finances of its owners. The owners are now known as shareholders, who will each own shares in the company. Shareholders receive a share of the profits, known as a dividend, as a reward for being a shareholder.
The business will be run by a Board of Directors, appointed by the shareholders. The shareholders may also act as the directors. The Board of Directors run the company on a day-to-day basis and will make all the important decisions.

Question 8

limited liability

Answer 8

Within limited companies, shareholders are not responsible for the company’s debts.

Shareholders may only lose the money they have invested in the company to help pay off any outstanding debts or liabilities. This means that the liability of shareholders is limited to the value of their investment into the company’s shares.

Question 9

unlimited liability

Answer 9

Unlimited liability is a big risk when operating as a sole trader or a partnership.

When it comes to money owed by a business, the owners may have to use their own personal funds to pay for any debts, possibly through the sale of their homes or other assets, if there is not enough money in the business to pay these debts fully. The owners are liable for any debts that the business incurs.

Question 10

Private limited company (Pvt Ltd) - pros

Answer 10

-Limited liability - protects the personal wealth of the shareholders
-Easier to raise finance as the company can sell shares
-Stable form of structure – the company continues to exist even when the shareholders change
-Original owners are likely to retain control

Question 11

Private limited company (Pvt Ltd) - cons

Answer 11

-Shareholders have to agree about how profits are distributed
-Greater administrative costs than setting up as a sole trader or partnership
-Finance limited to “friends and family”
-Less privacy - public disclosure of company information, but not as extreme as for a plc
-Directors’ legal duties are stricter

Question 12

what is franchising

Answer 12

The right given by one business to another to sell goods or services using its name

Question 13

franchisor

Answer 13

The business that gives franchisees the right to sell its product, in return for a fixed sum of money or a royalty payment:

Question 14

franchisee

Answer 14

A person or company that is granted a license to do business under the franchisor’s trademark. The franchisee purchases a franchise from the franchisor:

Question 15

Advantages of setting up as a franchise

Answer 15

The franchisor still owns the business and will receive royalties from the franchisee
Tested and developed format & brand; the franchisee is more likely to succeed in the new business
Advice, support, training is available to the franchisee
Easier to raise finance, as the brand is recognised
No industry expertise is required
The franchisee can benefit from the buying power of the franchisor
Lower risk method for the franchisee and lower failure rate; the franchisor is able to expand without the risk

Question 16

Disadvantages for the franchisee

Answer 16

Not cheap! The franchisee has to pay substantial initial fees and ongoing royalties and commission. He/she may also have to buy goods directly from the franchisor at a mark-up, making them more expensive
There are restrictions on marketing activities, for example not being allowed to undercut nearby franchises, and on selling the business
There is a risk that the franchisor will go out of business
The franchise needs to earn enough profit to satisfy both the franchisee and the franchisor

Question 17

factors influencing location decisions - raw materials

Answer 17

-raw materials - The business may depend on supplies of a particular raw material. Costs will therefore be lower if the business is located near the supplier

Question 18

factors influencing location decisions - proximity to market

Answer 18

Businesses may need to be located near their target demographic
This can be very important for businesses that provide a service.
This is less important for online businesses, as customer access is via their website.

Question 19

factors influencing location decisions - competition

Answer 19

If a new business sees a “gap in the market” where there is no competitor, this might be a good reason to locate there.

However, this might mean that this is not a profitable location for any business.

In some cases, it may be of benefit to be near a competitor, as customers may come to the competitor, but then see another business that is nearby.

Question 20

factors influencing location decisions - costs

Answer 20

A start-up business is likely to have limited finance. Existing business are likely to have competitors and will want to keep costs low.

Having premises will mean that a business will have to pay rates, insurance and many other ongoing costs, as well as the rental or purchase costs.

The cost of premises and labour varies in different locations e.g. city centre v out of town.

Question 21

factors influencing location decisions - labour

Answer 21

When a start-up business needs to hire employees, then access to a reliable supply of skilled staff will be important.

Labour intensive businesses often look to locate in areas of traditionally low wages or higher unemployment.

Some businesses will need specific skills and therefore will need to be located near the availability of this type of worker.