1.4 Making the business effective

Question 1

1.4.1 Limited liability

Answer 1

If the business has debts it can’t pay the shareholders aren’t personally responsible for helping repay the debts. They will loose what they have already invested in the business.

Question 2

1.4.1 Unlimited liability

Answer 2

The owner and business are one entity which means if the business has debts it cannot pay then the owners take full responsibility for paying the debt.

Question 3

1.4.1 Sole trader - one person owns and runs the business

Answer 3

Unlimited liability
Advantages - Keeps all profit, owner has complete control, quick and easy to setup
Disadvantages - Work long hours, lenders are more reluctant to give them finance as they are seen as more risky

Question 4

1.4.1 Partnership - 2 to 20 people owning business

Answer 4

Unlimited liability
Advantages - Partners can bring different skills and expertise to the business, raise more capital, quick and easy to setup, liability is shared
Disadvantages - Have to share profits, disagreements

Question 5

1.4.1 LTD - owned by shareholders, business decides who to give shares to

Answer 5

Limited liability
Advantages - Can sell shares to raise more capital
Disadvantages - Have to publish financial info, takes time to setup, profits have to be shared between shareholders, risk of loosing control to shareholders

Question 6

1.4.1 Franchise definition

Answer 6

A franchise is when a business allows another business the right to trade under its name in return for payments

Question 7

1.4.1 Franchising + and -

Answer 7

Advantages - Franchisee has an establish brand, training, equipment, support, access to goods, advertising
Disadvantages - Limited control, huge upfront fee, royalty payments (payments that are part of profits than need to be paid annually), other franchisees can risk the reputation of the franchise

Question 8

1.4.4 Business plans role and importance

Answer 8

To identify business aims and objectives, target market, forecast revenue, cost and profit, cash flow forecast sources of finance, location, marketing mix

Question 9

1.4.4 The purpose of a business plan

Answer 9

To minimise risk and obtaining finance