1.5.4 Forms of Business

Question 1

What is a Sole Trader?

Answer 1

A business organization with one owner, but can employ any number of people.

Question 2

Sole Trader Facts:

Answer 2

> Setting up as a sole trader is easy as there are no legal formalities
All sole traders have unlimited liability.

Question 3

What is unlimited liability?

Answer 3

A legal status which means that the owner of a business is personally liable for debts.

Question 4

Advantages and Disadvantages of Sole Traders:

Answer 4

> A: The owner can keep all the profit to themselves.
D: The owner may struggle to raise finance, as lenders consider them risky.
A: The owner has complete control over the business.
D: Independence could be a burden, e.g. the owner could fall ill and have no one to fill in.
A: Easy to set up with no legal requirements.
D: Owner has unlimited liability.
A: The business can be flexible and quickly adapt to change. They can also offer a more personal service if they are small.
D: Usually too small to exploit economies of scale.
A: May qualify for government help.
D: Owner is likely to have to work very hard, with long hours.

Question 5

What is a partnership?

Answer 5

A business organisation that is owned by two or more people. The joint owners share responsibility for the business and also profits.

Question 6

What is a deed of partnership?

Answer 6

A legal document that states the formal rights of partners. It includes things like how profits will be shared, how much control each partner has, etc.

Question 7

Partnership Advantages and Disadvantages:

Answer 7

> A: Easy to set up and run with no legal formalities.
D: Unlimited liability
A: Partners can specialise in their area of expertise.
D: Partners may disagree and fall out.
A: Partners share the risks of running the business They also share the heavy workload.
D: Partners have to share the profit.
A: More owner scan bring in more capital.
D: One partner’s actions are legally binding on all other partners
A: They do not have to publish financial information.
D: Limited growth potential.

Question 8

Limited liability definition:

Answer 8

A legal status which means that a business owner is only liable for the original amount of money invested in the business.

Question 9

What is a limited company?

Answer 9

A company that has a separate legal identity from its owners.

Question 10

Features of limited companies (both types):

Answer 10

> Capital is raised by selling shares.
Owners have limited liability
Pay corporation tax.

Question 11

Features of private limited companies:

Answer 11

> Shares can only be transferred privately.
Often family businesses owned by family members + friends.
Directors tend to be shareholders that help run the business.

Question 12

Private Limited Companies Advantages + Disadvantages.

Answer 12

> A: Shareholders have limited liability
D: Have to publish their financial information.
A: More capital can be raised from issuing shares.
D: Profits shared between more members.
A: Control over the business can’t be lost to outsiders. All shareholders must agree on the transfer of shares.
D: Takes time to transfer shares to new owners because it can take time to come to an agreement.
A: Owners can have tax advantages, e.g. pay less tax.
D: Higher setting up costs have to be met.
A: Higher status than other forms of business like sole traders. May find it easier to raise capital.
D: Can’t raise as much as PLCs.

Question 13

What is a franchise?

Answer 13

A business model in which a business (the franchisor) allows another operator (the franchisee) to trade under their name.

Question 14

How does a franchise work?

Answer 14

The franchisor provides a variety of services to its franchisees. e.g. a license for their products, a start-up package, a brand name, training, etc.
In return the franchisee has to pay some fees, e.g. an initial start-up fee, a percentage of profits, one-off fees for training, etc.

Question 15

How does a franchise work?

Answer 15

The franchisor provides a variety of services to its franchisees. e.g. a license for their products, a start-up package, a brand name, training, etc.
In return the franchisee has to pay some fees, e.g. an initial start-up fee, a percentage of profits, one-off fees for training, etc.

Question 16

Advantages + Disadvantages to Franchisees:

Answer 16

> A: Lower risk, as the idea is already tried and tested. Due to lower risk they will have easier access to loans and borrowed money.
D: Profits are shared with the franchisor.
A: Support from the franchisor.
D: Less independence than if they had their own company. Strict rules to follow.
A: Set-up costs are predictable, so the franchisee will be prepared.
D: Setting up can still be expensive, even if predictable.
A: Can benefit from national marketing campaigns by the franchisor.
D: National advertising can be poor.

Question 17

Advantages + Disadvantages to Franchisors:

Answer 17

> A: Fast method of growth.
D: Potential profit is shared with franchisees. If the company started the new business without the franchisees they’d have all the profit themselves.
A: Cheaper method of growth, as franchisees take some of the financial risk.
D: The cost of supporting franchisees may be high.
A: Franchisees are more motivated than employees, because they have more to gain.
D: Poor franchisees can damage the brand’s reputation.
A: Can sell supplies directly to franchisees to make more money.
D: Franchisees may purchase supplies elsewhere.

Question 18

Social Enterprises:

Answer 18

A business that trades with the objective of improving human or environmental well-being.
Generally, they;
> Have a clear mission.
> Reinvest most/all of their profits.
> Are accountable and transparent.

Question 19

Forms of social enterprise.

Answer 19

Co-operatives - business organisations owned by its members. They are run in the interests of their members and any surplus made is distributed to them.
Worker co-operatives - businesses jointly owned by employees.
Mutual organisations - owned by members, who are customers not shareholders. Profits are returned to members in the form of better + cheaper products.
Charities - raise money for various causes and draw attention to disadvantaged groups.

Question 20

Lifestyle Businesses

Answer 20

A business that aims to make enough money and provide the flexibility to support a particular lifestyle for the owner.
> Often small with one owner.
> Personal interests are likely to influence the business to make work more enjoyable.
> Less stressful than other forms of business.
Similar advantages and disadvantages to sole traders.
> Not many external investors are likely to fund them because they do not aim for growth. Owners usually have to provide all funding.

Question 21

Online Businesses

Answer 21

A business that uses the global communication infrastructure of the internet as a trading base.
> No strict legal requirements.
> Low set-up costs, but can be difficult to begin.
> Sponsored advertising brings in revenue.
> Gives all businesses access to global markets, and international suppliers and employees.

Question 22

What is a PLC?

Answer 22

A public limited company is a business owned by shareholders where the shares can be traded openly on the stock market.

Question 23

What is stock market flotation (IPO - Initial Public Offering)?

Answer 23

The process of a company ‘going public’, making shares available to the public for the first time.

The process is time-consuming and expensive. Lawyers are needed to ensure it is legally correct, admin expenses, etc.

Question 24

Advantages + Disadvantages of PLCs:

Answer 24

> A: Same as Private Limited Companies. E.g. limited liability for all owners, more market power due to larger size, etc.
D: Setting-up costs can be very expensive, it can often cost millions of pounds (stock market flotation).
A: Huge amounts of money can be raised from the sale of shares to the public.
D: Anyone can buy shares, so it is possible for an ‘outsider’ to exert control on the company. They can take complete control if they buy enough shares.
A: PLCs are expected to grow and as they do unit costs are likely to fall due to economies of scale. This will improve their competitiveness and generate more profit. Therefore, PLCs can often dominate the market. For example they can create barriers to entry.
D: Because of their size it is more difficult to deal with customers at a personal level. Some customers will prefer the personal service of a much smaller enterprise.
A: It becomes easier to raise because financial institutions are more willing to lend to PLCs. They have a wider range of capital resources to choose from.
D: Member’s of the public can inspect all of the company’s accounts. Competitors can use the information to their advantage.
A: Pressures from the media and financial analysts, as well as the threat of a takeover, encourages executives and managers perform well and make profits. Private limited companies don’t have these pressures.
D: There may be a divorce of ownership from control. Senior managers may pursue their own objectives, possibly at the expense of shareholders.