1.5.4 Forms Of Business

Question 1

Legal forms of business

Answer 1

Sole trader
Partnership
Private limited company
Public limited company

Question 2

Other forms of business

Answer 2

Franchising
Social enterprise
Lifestvle businesses
Online businesses

Question 3

Sole trader

Answer 3

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

Question 4

Sole trader. Key benefits:

Answer 4

Owner has full control over decisions.
Owner keeps all profits made.
Minimal paperwork needed to start up

Question 5

Sole trader. Key drawbacks:

Answer 5

• Öwner has unlimited liability for debts

* Hard to raise finance

Question 6

Partnership

Answer 6

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.

Question 7

Partnership key benefits

Answer 7

• More owners can allow more finance to be raised
• Partners may bring varied skills and experience
• Shared burden of responsibility among partners

Question 8

Drawbacks partnerships

Answer 8

• Partners have unlimited liability

* Potential for disagreement among partners

Question 9

Unlimited liability

Answer 9

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.

Question 10

Importance of limited liability

Answer 10

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.

Question 11

Private limited company

Answer 11

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.

Question 12

Public limited company

Answer 12

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.

Question 13

Franchising

Answer 13

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.

Question 14

Franchising benefits: (for franchisees)

Answer 14

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

Question 15

Drawbacks for franchisees

Answer 15

• 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.

Question 16

Social enterprise

Answer 16

Social enterprises place the desire to fix a social problem above the
profit motive when making decisions.

Question 17

Lifestyle business

Answer 17

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.

Question 18

Online businesses

Answer 18

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)

Question 19

Unincorporated forms of business

Answer 19

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

Question 20

PLC and LTDs are what form of business

Answer 20

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

Question 21

The legal partnership agreement sets out how

the partnership is run, covering areas such as:

Answer 21

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

Question 22

Benefits of operating in a partnership tutor2u vid

Answer 22

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

Question 23

Drawbacks partnerships tutor2u vid

Answer 23

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

Question 24

Benefits of operating at a limited company tutor2u

Answer 24

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.

Question 25

Disadvantages tutor2u as operating as a limited company

Answer 25

Greater admin costs.
Public disclosure of company
information.
Directors legal duties