1.5.4 Forms Of Business Flashcards
Business forms
A business form is the legal structure that it takes (in the UK). It could be a sole trader, a partnership, a private limited company (Ltd) or a public limited company (PLC)
Limited liability
Limited liability means that the owner of the business has no personal liability for business debts. The owner has a separate legal identity from the business and is NOT liable for payment of the debts from their own personal funds.
Unlimited liability
• If a business gains debts, or goes bust or is sued this could be a problem for the owner
• If there is no money in the business then the owner would need to pay using their own savings
Sole trader
• Business owned by one owner, but they can take on staff
• Also known as a sole proprietor
• Can employ people but they will not be involved in control of business
Advantages of sole trader
• Easy to set up – no complicated forms
• Make decisions quickly
• Less capital needed
• All profits kept by the owner
Disadvantages of sole trader
• Unlimited liability, this means that if the business has financial difficulties the sole trader could lose their own assets like their savings, house or car
• Difficult to raise money – seen as a risk
Partnerships
• Two or more people – ie the partners - share the risks, costs and responsibilities of being in business
• The profits and gains of the partnership are shared among the partners, unless the partnership agreement states otherwise
Advantages of partnership
• Easier than a sole trader to raise extra capital, as partners all have their own sources of finance e.g. savings
• Profits go to partners, which is very motivating
Disadvantages of partnership
• Unlimited liability
• Partners may have disagreements
Private limited company (ltd)
• Sole traders may grow and expand and want to become a ltd company
• Friends and family can buy shares in the business, this will make them part owners
Advantages of Private limited company (ltd)
• Limited liability
• Can raise extra capital by selling more shares, to friends and family, making it easier to expand
Disadvantages of Private limited company (ltd)
• Accounts of the company cannot be kept private
• More difficult and expensive to set up - more administration
Franchisee
Franchisee; This is the business owner who is buying the rights e.g. Gurdeep
Franchisor
Franchisor; this is the business that is selling the rights e.g. Subway
Advantages of a franchise
• The franchisor chooses the franchisees carefully – knows what characteristic that make a successful franchisee
• The franchisor decides how much money the franchisee must invest in the business
