1.5.4 Forms Of Business Flashcards
Legal forms of business
Sole trader
Partnership
Private limited company
Public limited company
Other forms of business
Franchising
Social enterprise
Lifestvle businesses
Online businesses
Sole trader
a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. UNLIMITED LIABILITY
Sole trader. Key benefits:
Owner has full control over decisions.
Owner keeps all profits made.
Minimal paperwork needed to start up
Sole trader. Key drawbacks:
- Öwner has unlimited liability for debts
* Hard to raise finance
Partnership
a partnership is perhaps
best thought of as a sole trader where several owners are allowed. This helps
to rise finance as each partner can bring capital into the business. In addition,
The burden of responsibility for running the business can be shared, potentially
among people with varied skills and experience. As with a sole trader, partners
till have unlimited liability for debts incurred in running the business.
Partnership key benefits
- More owners can allow more finance to be raised
- Partners may bring varied skills and experience
- Shared burden of responsibility among partners
Drawbacks partnerships
- Partners have unlimited liability
* Potential for disagreement among partners
Unlimited liability
Unlimited liability means that the owners of the business must take personal responsibility for covering debts run up by their business. If the business goes bust, the owner can be forced to sell their own personal assets to repay lenders, suppliers or employees to whom money is owed.
Importance of limited liability
Without this protection, far fewer investors would be
willing to invest their money into multi-billion pound firms whose debts
could run into billions of pounds.
Private limited company
A business that is owned by its shareholders, run by directors and where the liability of shareholders for the debts of the company is limited.
Public limited company
A public limited company is the only type of business that can sell shares
via the stock market to the general public. This allows them to raise
Vast sums of share capital. However, in order to become a public limited
company, a business must have a minimum of £50,000 share capital. There are considerable regulatory requirements involved in floating the company on the stock market. Continuing to meet the
annual requirements of the stock market will cost tens or hundreds of
times more than running a private limited company.
Franchising
A franchise is a licence to use another business's name and business model in return for payment. A franchisor is a business that sells the right to use its name and logo to other businesses or entrepreneurs. A franchisee is an entrepreneur or company that buys a licence to use another business's name and business model in return for payment.
Franchising benefits: (for franchisees)
Access to a tried and tested formula for business success
• Support from the franchisor in providing materials and fixtures and fittings
Advice and training on all business functions
• Possibility of a national advertising campaign from the franchisor
• Easier access to loans as banks recognise the lower risk involved in
starting as a franchisee
Drawbacks for franchisees
• The franchisee may feel frustrated at being unable to make decisions
dictated by the franchisor.
• There is likely to be an initial franchise fee to buy the licence
(perhaps several hundred thousand pounds for the most popular
franchised brands).
• The franchisor will also expect royalties, a percentage of revenue.
Social enterprise
Social enterprises place the desire to fix a social problem above the
profit motive when making decisions.
Lifestyle business
Some entrepreneurs start up a business because it suits their desired
lifestyle. This may mean that maximising profit is far from the most
important issue considered when making decisions for these businesses.
For some, running their own business may give flexibility in working
hours to fit around family commitments: for example, leaving a highly
paid job that requires long periods away from home in order to start up
a small computer repair business could allow an entrepreneur to fit work
commitments round their children’s sports days and Christmas plays.
Online businesses
As the internet has grown over the past 30 years to become a huge part
of modern life, business opportunities have grown out of the technology.
Most important is the way the internet has enabled businesses to connect
with consumers effectively without the need to ever meet face to face.
The result is that traditional ‘bricks and mortar’ businesses now face
competition from many online-only companies. In general, online offers
two powerful advantages over traditional ‘bricks and mortar’ businesses:
• Lower costs (with no need to spend on physical premises)
• Higher potential revenues (with the scope to sell worldwide)
Unincorporated forms of business
Sole trader, partnership. The owner is the business - no legal difference. • Owner has unlimited liability for business actions (including debts)
• Most unincorporated businesses operate as sole traders
PLC and LTDs are what form of business
Incorporated. • Legal difference between the business (company) and the owners
• Owners (shareholders) have limited liability. Incorporated business Is a company A company is a
separate legal entity. The owners of a company are shareholders
The legal partnership agreement sets out how
the partnership is run, covering areas such as:
When a business is started and owned by more than one person. How profits are to be shared
What the partners have to invest into the business
How decisions are taken
What happens if a partner wants to leave or dies
Benefits of operating in a partnership tutor2u vid
Quite simple - certainly the simplest way for two or more people to form a business together- Minimal paperwork once Partnership
agreement set up. Business benefits from the expertise and
efforts of more than one owner-
Partners can provide specialist skills.
Greater potential to raise finance - partners
each provide the investment
Drawbacks partnerships tutor2u vid
Full personal liability - “unlimited liability”.
A poor decision by one partner damages the interests of the other partners.
Harder to raise finance than a company.
Partners are bound to honour decisions of others.
Complicated to sell or close
Benefits of operating at a limited company tutor2u
Limited liability - protects the shareholders (the big advantage). Easier to raise finance - sale of shares and also easier to raise debt. Stable form of structure - business continues to exist even when shareholders change.
Disadvantages tutor2u as operating as a limited company
Greater admin costs.
Public disclosure of company
information.
Directors legal duties
