1.4 Types of business organisation Flashcards
Define sole trader
an individual who may or may not employ other people, but who owns and operates a business
5 Advantages of being a sole trader
- easy to set up
- can often be set up with little capital
- own boss -> full control over the business
- profit doesn’t have to be shared
- personal contact with customers -> increase customer loyalty
5 Disadvantages of being a sole trader
- full responsibility: work long hours
- unlimited liability
- often lack all the skills that are needed
- often lack capital to buy new equipment or to expand
- may lose profits if the owner is sick/ on holiday
Define unlimited liability
owner has a legal obligation to pay any losses made by the business
Define partnership
a business association between two or more owners of an enterprise, usually between 2-20 members.
5 Advantages of partnership
- relatively easy to set up
- capital from partners, so more capital available
- bring new skills & ideas into the business
- affairs can be kept private
- risks and responsibilities spread among partners
5 disadvantages of partnership
- unlimited liability
- slow decision making process
- limitation of number of partners
- problems can arise if partners are lazy
- if partnership was set up by legal agreement, it will need to be re-formed if one partner dies
Deed of parnership
- how much profit & losses are to be shared
- how much money each parter has put into the business
- how much each partner gets paid
- working arrangements of the partnership
- arrangements for adding/ removing a partner
- arrangements for ending the partnership
Define private limited companies (LTD)
- owned by shareholders
- run by directors
- limited liability
4 Advantages of LTD
- shares issued to raise money
- shares not to general public- family and friends
- limited liability
- small number of directors
5 Disadvantages of LTD
- financial information available to public
- shares can be sold at any time by shareholders
- shareholders might not have money to help expand
- share of profit to shareholders
- information to Registrar of companies, time consuming and expensive
Define public limited companies (PLC)
a company that is able to offer its shares to the public
Requirements of a PLC
- minimum # of shareholders=2
- accounts must be filed within 6 months of the year end (9 months for LTD)
- company secretary must be a qualified person (not the case for LTD)
- minimum # of directors =2 (1 for LTD)
4 Advantages of PLC
- limited liability
- easily borrow money to expand
- raise money by selling shares
- shareholders have little say unless they own lots of shares
4 Disadvantages of PLC
- complicated & expensive to set up
- general public can view accounts
- shareholders get dividends
- easily taken-over by buying on stock exchange
Process of setting up a LTD/ PLC
- owners of a business -> ‘companies house’ to get approval
- hand in the articles of association (rules + policies of the business)
- hand in memorandum of association (sets out what the company has been formed to do) - if they are happy, they will give you certificate of incorporation
Define franchising
The franchisor grants a licence to a franchisee to produce a product, sell products/ provide services in a given area. It is a marketing arrangement allowing another business to trade in the same style as an existing business
Define royalty
a payment made to the franchisor based on the sales turnover of the franchise
Advantages of franchising
- gets support from franchisor, less risk
Disadvantages of franchising
- have to pay to the franchisor
define joint ventures
two independent businesses set up a new enterprise in which they jointly own a stake (form of a partnership)
types of organisation with limited liability
LTD and PLC
define public corporation
businesses owned by governments, however, considerable amount of freedom
purpose of public corporations
- make sure that important activities that affect the whole nation are carried out well
- to preserve jobs
define nationalisation
when a business/industry is taken over by the government
define privatisation
selling a public corporation to shareholders
Disadvantages of public corporations
- become too large & difficult to manage
- lack of competition can lead to higher prices & wasteful use of resources
