1.4 Types of business organisation Flashcards
Define a sole trader.
A sole trader is a business owned by one person who is responsible for all decisions, capital invested and risk.
Therefore, the sole trader has complete control over how the business is run, but is limited to their own funds or loans in order to finance the business.
Define a partnership.
A partnership is where two or more people join together to set up a business.
There is shared decision making, capital investment and risk.
What is a private limited company.
If the partners start to further expand they can consider a private limited company.
This will allow further capital investment, usually from friends and family, but less control in how the business is run, as the new investors will have an input into decision making.
Setting up a private limited company is more complicated and costly than starting a sole trader or partnership, but much more straight forward than a public limited company.
What is a public limited company.
The final step is changing to a public limited company.
Much more capital can be raised as shares can be sold to members of the public, but shareholders also have a greater influence over decision making.
Setting up a public limited company is complicated, high cost, and time consuming.
Public limited companies must publish financial information about their profits, so there is less privacy of the business operations.
What is an unincorporated business?
Name examples of an unincorporated business.
An unincorporated business refers to a business where in the eyes of the law there is no separation between the owners and the business.
The owners and the businesses are one and the same.
Sole Traders and Partnerships are examples.
What are the risks unincorporated businesses face?
If sole traders or partnerships go bankrupt there is unlimited liability.
Owners personal assets may be taken to pay for debts of the company.
If a sole trader goes bankrupt and owes money to the bank, the bank can repossess the sole traders personal property to repay the loan.
What is an incorporated business?
Name examples.
An incorporated business refers to a business where there is a separation between owners, who are called shareholders, as they all own a small slice or (share) of the company.
There is limited liability so much lower risks for shareholders compared to being a sole trader or in a partnership.
Public and Private Limited Companies are examples.
Name some examples of Sole Traders.
Small businesses, independent shops or tradespeople like plumbers and electricians.
Name some examples of Partnerships.
Professionals like lawyers, doctors, dentists.
Name some examples of Private Limited Companies.
Mid-sized firms that are often family owned, for example George Smith and Sons Ltd.
Name some examples of Public Limited Companies.
Large companies that want to raise a lot of capital, usually for expansion.
Facebook, Apple, Walmart and Shell are some of the world’s largest public limited companies.
What are joint ventures?
Explain with examples.
Joint Ventures (or JVs as they are often known on the business news) are when two companies work together on a specific project.
They share capital and risks. They benefit from each other’s expertise and split profits from the venture.
In return they will both take a share of the profits.
A great example of this is HULU. Disney and Comcast teamed up to create a streaming service to rival Netflix. They both shared capital and expertise (and contributed their content like movies and TV shows)
Explain a franchise with an example.
A Franchise is when a businessbuys the license to use another company’s logo and branding, and sell their products.
An entrepreneur entering a franchise agreement with Starbucks is called the franchisee, Starbucks is the franchisor.
What are the benefits of a franchise agreement?
Access to popular products and loyal customer base, so less risk of failure
Franchisor responsible for marketing
The franchisor can assist with setting up the business (training and support)
What are the limitations of a franchise agreement?
Must share profits with the franchisor
Must follow rules and regulations set by the franchisor
