1.5.4 Forms of business Flashcards
Unincorporated
The owner = the business
Owner has unlimited liability for business actions
Most = sole traders
Incorporated
Legal difference between business and owner - separate legal identity
Owners/shareholders have limited liability
Most = LTD
Unlimited liability
Business owner = personally responsible for debts and liability of the business
If unincorporated business fails the owners are liable for the amounts owed
Sole Trader Advantages
Easy to set up - no complicated forms Make quick decisions All profit kept Company info is private Less capital needed
Sole trader disadvantages
Unlimited liability
Difficult to raise money - seen as a risk
No economies of scale
No one to take over - unwell, holidays
Partnerships Advantages
Legal partnership agreement set out - how profits are shared, what partners have to invest, how decisions are taken, what happens if partner leaves. Advantages Larger range skills and knowledge Partners able to raise more capital Pressure on owners is reduced - holiday
Partnerships Disadvantages
Control is shared - arguments common
Still a shortage of capital
Unlimited liability
Limited liability
Shareholders can only loose the value of their investment in the share capital of the company
Shareholders do not own company assets
Private and public limited company
Private limited company - LTD
Owners control who buys shares
LTD - Advantages
Limited liability for shareholders
Capital raised by selling shares
Control cannot be lost by outsiders
Owners have tax advantages
LTD - Disadvantages
Must publish financial info of performance Greater scrutiny of activities Very expensive to set up Founder may loose control Significant administrative expenses
Going from LTD to PLC
If LTD has grown and needs further investment may consider - PLC
Going public = expensive - lawyers draw up legal paperwork, publications,, insurance against unsold shares, need 50k in share capital, advertising and admin
Social enterprise
Not for profit - have a social mission
Usually generate incomes through donations and reinvest most of the profit
Franchises
Franchisor grants a license to another Business to allow it to trade using brand format
Benefits to franchisor
Can accelerate growth of a proven service business format
Enables rapid geographical growth for a minimum investment
Still have option to open sole branches
Can cream off above normal profits
Risk of failure reduced - if fail, cost paid by franchisee
Drawbacks to franchisor
Franchisee keeps some profit
Significant cost in supporting franchises e.g. training
Unsuccessful franchise could affect business as a whole e.g hygiene - affects brand na,e
Benefits to franchisee
Don’t have to advertise or promote
Less failure risk - established brand
Training administration fees etc - paid by franchisor
Set up and ongoing costs = predictable
Drawbacks to franchisee
Fees - set up, on going etc may be higher than expected
Contract - can loose franchise and also restrictions such as Non - competition clauses
Other franchises can give bad name
Life style business
Provides great quality of life for owner - allows them to live how they want
Business objectives not important
Business = something they enjoy
Online business
Can be managed from anywhere - don’t need to be in an office
Available 24/7
Easy to set up
