1.4.1 The Options for Start-up and Small Businesses

Question 1

Limited liability:

Answer 1

• business owner or owners are only responsible for businessdebts up to the value of their financial investment in the business
• this means that acreditor can only take assets or finances belonging to the company

Question 2

Advantages of limited liability:

Answer 2

• Limited liability provides a layer of protection for business owners as limited liability businesses have its own legal identity, meaning that its owners are not personally responsible for itsdebts
• Less risk of losing personal possessions/assets → increased likelihood of taking risks → increases potential for growth of the business into a larger company
• Limited liability means shareholders are more likely yo invest into a new business idea → increases the attractiveness of the investment → as a result encourages enterprise and entrepreneurship
• Companies pay corporation tax at 19 per cent (which is lower than income tax)
• The company can be run with just one member
• The company can perform actions such as opening its own bank accounts, buying property & assets, investing and taking out insurance, all in its own name
• The company can issue shares (a good way of raising capital)
• A company can retain profits into future tax years
• The company has independent existence from you, so can be sold or passed on

Question 3

Disadvantages of limited liability:

Answer 3

• Reduced control – amount of control held by main owner depends on the proportion of the business sold as shares to other shareholders (shareholders may dispute over decisions)
• Profits shared between shareholders in proportion to number of shares they own
• More complex accounts, for which you’ll probably need an accountant
• The company’s accounts will be made public - accounts are filed with Companies House and can be viewed by anyone on a small payment

Question 4

Examples of companies with limited liability:

Answer 4

private limited companies

Question 5

Unlimited liability:

Answer 5

the business owner(s) are personally responsible for all of the debts of the business, no matter what the value

Question 6

Advantages of unlimited liability:

Answer 6

• Owners have the ultimate power and complete control over the business as they are free to make all business decisions within the law
• Establishing and organising sole proprietorship and general partnership firm is easy
• Dissolving the business is easy as the owners take all decisions
• Complete confidentiality of the business can be maintained as the owners have complete control
• Management decisions will be improved and cautious as there is a risk of personal liability for the business actions
• Creditors and other stakeholders will have more confidence in the business, as the owners have unlimited liability as the business owners will also be careful inbusiness operationsas they have complete responsibility
• Theshare capitaland the initial investment are at the flexibility of the owners as there will not be any pressure for fixed contribution
• Owner has 100% control of business decisions
• Owner keeps 100% of profits
• Accounts do not have to be made public

Question 7

Disadvantages of unlimited liability:

Answer 7

• Unlimited liability can have big implications for business owners as having unlimited liability gives business owners a greater amount of risk - unlimited liability business does not have its own legal identity and the owners are personally responsible for all debts of the business
• With unlimited liability, the owners will be careful in decision making, which can slow down the developments of the business as they will refrain from taking any risky business decisions this may mean the business can even lose some good opportunities because of this
• Acts of all stakeholders can impact the owners (e.g. even an act of an employee which is unlawful can put the owners at risk
• The growth of the business is purely in the hands of owners, as the business will cease to exist if the owner leaves, retires, or dies

Question 8

Examples of unlimited liability companies:

Answer 8

• sole trader
• sole proprietorship
• partnership

Question 9

Main difference between limited and unlimited liability:

Answer 9

• main difference between unlimited and limited liability is the level of risk that a business is willing to take
• having unlimited liability is a bigger risk for any business than having limited liability

Question 10

Sole trader:

Answer 10

• a business that is owned and run by one person
• there is only one owner, but they may have employees who work for them (do’t share ownership)

Question 11

Advantages of sole traders:

Answer 11

• it is quick and easy to set up as a sole trader
• the business owner will have a lot of control (gets to make all the decisions) over the business and its money
• it gives individuals the opportunity to be their own boss and make all the business decisions
• It has low set-up costs
• sole trader keeps all profits
• financial info kept private
• minimal paper work

Question 12

Disadvantages of sole traders:

Answer 12

• it has the risk of unlimited liability
• it can involve long work hours and stressful conditions - lot of pressure on 1 person
• no one to cover when sole trader ill or take off
• there is a high level of responsibility for the owner
• often the owner performs many different roles in the business
• harder to raise finance to establish/grow the business
• may not have all the skills necessary to handle all areas of the business
• heavy workload

Question 13

Examples of sole traders:

Answer 13

• sole traders are usually start-ups or small businesses
• e.g. photographers, electricians, hairdressers, graphic designers, social media influencers, bloggers, small online clothing brand owners and beauty therapists may set up as sole traders

Question 14

Partnership:

Answer 14

• a type of business that has 2 or more owners
• they decide to set up and run a business between them

Question 15

Deed of partnership:

Answer 15

set of rules that the owners agree to which is outlined in a document

Question 16

Examples of partnerships:

Answer 16

• partnerships often found in businesses that provide a professional service
• E.g. lawyers, doctors and accountancy practices

Question 17

Advantages of partnerships:

Answer 17

• owners may have wider expertise (can provide specialist knowledge and skills) and cans hare ideas and decision-making
• owners share risk
• jobs can be shared
• greater potential to raise finance
• any losses will be shared
• could be easier to raise finance to establish/grow business - shared responsibility for debt by the owners
• are usually quick and easy to set up
• minimal paperwork once Partnership Agreement is set up

Question 18

Disadvantages of partnerships:

Answer 18

• decisions made by one partner affects all parts of business - partners have to live with each others’ decisions
• decision making can take longer
• harder to raise finance than a company
• profits has to be shared
• short life - no longer exists if one partner leaves/dies
• conflict amongst owners can occur
• risk ofunlimited liability
• one partner may let the others down by not upholding their responsibilities in the business
• can involve long work hours

Question 19

Private limited company:

Answer 19

• company that has limited liability
• often have ‘Ltd’ after the business name
• any type of business can set up as a private limited company

Question 20

Examples of private limited companies:

Answer 20

local retailers (e.g. restaurants and shops that don’t have a national presence)

Question 21

What are the owners of private limited company’s called and how did they become owners?

Answer 21

• The owners of a private limited company are known asshareholders
• Shareholders have to be invited by the business before they can purchase ashare of the business

Question 22

Share:

Answer 22

a portion or percentage of a company

Question 23

What do private limited companies have to pay?

Answer 23

• private limited companies paycorporation tax
• corporation tax is a tax on theprofits of a business

Question 24

Advantages of private limited companies:

Answer 24

• owners have limited liability - protects the personal wealth of the shareholders
• gives individuals the opportunity to be their own boss
• any new shareholders need to be invited, which protects business from outside influence
• stable form of structure - company continues to exist and trade even when shareholders change
• customers may trust ‘Ltd’ more than other businesses
• could be easier to raise finance to establish/grow business - as shares in the business can be sold to raise finance
• original owners are likely to retain control

Question 25

Disadvantages of private limited companies:

Answer 25

• main downsides of founding a company as a private limited company is that there is more paperwork to do, because the business has to register withCompanies House and file annual financial reports
• more complicated to set up than sole trader or partnership
• often more paperwork
• less privacy - public disclosure of company information and business’s financial information
• the business may require outside professional help to manage its finances
• more info must be reported to gov
• may be conflict between shareholders
• shareholders have to agree about how profits are to be distributed
• greater administrative costs than setting up as a sole partnership
• finance limited to “friends and family”
• directors’ legal duties are stricter

Question 26

Franchise:

Answer 26

• business that gives the right to another person or business to sellgoods orservices using its name
• it does this by providing the person or other business with alicence

Question 27

Franchisee:

Answer 27

a business that agrees to manufacture, distribute or sell branded products under the licence of a franchisor

Question 28

Franchisor:

Answer 28

a business that gives franchisees the right to manufacture, distribute or sell its branded products in return for a fixed sum of money orroyalty payment

Question 29

Advantages of setting up a franchise (for franchisee):

Answer 29

• the franchisee gets access to free specific training, advice, support and marketing
• brand image and reputation already established
  
  • easier to raise finance, as the brand is recognised
  • may have an established customer base
  • lower risk
  • already tested and developed brand and format
• higher chance of survival
• no industry expertise is required
• franchisee can benefit from the buying of the power of the franchisor - economies of scale

Question 30

Disadvantages of setting up a franchise (for franchisee):

Answer 30

• not cheap (can be expensive to set up) the franchisee has to pay substantial initial fees and ongoing royalties (percentage of sales revenue) and commission to franchisor - they may also have to buy goods directly from the franchisor at a mark-up, making them more expensive
• the franchisee cannot make individual business decisions without consulting the franchisor - less control and freedom
• restrictions on marketing activities + restrictions on where it can be set up e.g. not being allowed to undercut nearby franchises, and on selling the business
• risk that the franchisor will go out of business
• franchisee needs to earn enough profit to satisfy themselves and the franchisor

Question 31

What is an alternative to setting up a business?

Answer 31

Buying into a franchise is an alternative to setting up a new business this way individuals can buy into an already successful business

Question 32

How does a new business become part of a franchise?

Answer 32

• to become part of a franchise, a new business must pay a fee
• in return, it gets to join the franchise and benefit from using its name, products, training, marketing and equipment

Question 33

What are most businesses in the UK?

Answer 33

most businesses in the UK are sole traders - normally operate as sole trader

Question 34

Advantages of setting up as a franchise (for franchisor):

Answer 34

• access to capital - can expand with little debt as business expands as capital becomes available from franchisees instead of taking on debt through loans
• efficient growth - expansion can be faster as franchisees provide labour and their sales provide growth
• minimal employee supervision - franchisor can focus on growth of business instead of day to day operations (reduced stress)
• successful locations can return high royalties
• consistent operations across business generally means improved efficiency and higher quality levels
• increased brand awareness - business will have more locations → more well known → increases customers → increases sales
• reduced risk - can expand without increase in risk as franchisee takes on debt and liability of opening unit under name of business
• franchisees should be fully committed due to the investment they put in
• franchisees may be more talented at growing the business and turning of profit than employees would be

Question 35

Disadvantages of setting up as a franchise (for the franchisor):

Answer 35

• loss of complete brand control → franchisees cannot be managed as closely as employees and may have different goals to franchisor
• increased potential for legal dispute → any legal disputes through court system cost time and money (takes away from success of franchise)
• initial investment (time and money) → franchisor must make sure franchise agreement written carefully and reviewed by lawyer experienced in franchise law, may hire franchise consultant
• selecting wrong franchisee → can ruin reputation of whole franchise, reduce sales
• sharing confidential info with franchisees is risk if they’re not fully committed to business
• franchisors earn royalties from sales & franchisees earn money from profits → achieving growth in both isn’t always possible, potentially causing conflict
• franchise recruitment can be slower and less efficient than employee recruitment