1.5.4. Forms of Business Flashcards
How many people operate a sole trader?
1
How is a sole trader financed?
Either by personal savings, family/friends or a loan from a financial institution.
What is the owner of a sole trader taxed on?
The profit that the business makes.
What records must a sole trader owner keep?
Proper and financial records of all income and expenditure.
What does the owner of a sole trader not have to publish?
Business accounts.
What must a sole trader owner complete for HM Revenue and Customs?
A self assessment tax return.
Who is responsible for a sole trader’s National Insurance contributions?
The owner.
What are the advantages of a sole trader?
- owner keeps all the profit
- owner makes all decisions
- relatively simple business to start up
What are the disadvantages of a sole trader?
- owner is partially responsible for all debts and losses (unlimited liability)
- owner must take total responsibility for efficient and effective running of business
- owner has limited ability to raise capital for expansion as business is usually small with a limited asset valuation for use as collateral security
How many people are in a partnership?
2 or more.
What act lays down fixed conditions that partners must follow?
Partnership Act 1890
What is a partnership agreement?
A legal document detailing how the partnership is to operate, and all partners must agree.
How is a partnership financed?
Self raised or from loans.
What is each partner taxed on?
Their share of the profits
What must partners keep records of?
All expenditures and incomes.
Advantages of partnerships?
- capital/risks/ideas are shared
- each partner can specialise in different areas
- normally raises capital easier because business is larger and has greater asset valuation
Disadvantages of partnerships?
- profit is shared
- equally responsible for debts
- decision making can be slow
PLC’s exist…
…in it’s own right.
What are the finances of PLC’s separate to?
The personal finances of owners.
What are shareholders protected by?
Limited liability.
What does limited liability mean?
That if the company fails, shareholders only lose the amount of capital that they have invested in the company.
What act must LTD’s follow?
The Companies Act 2006
How many shares must a LTD have?
At least one
Can a LTD issue shares to the general public?
No.
Where must a LTD be registered?
Companies House.
How many directors must a LTD have?
At least one.
What does a LTD director do?
Makes all management decisions.
What must a LTD file?
Annual accounts with Companies House.
What are advantages of a LTD?
- less risky as shareholders are protected by Limited Liability
- this encourages more people to invest, which gives the company a larger capital base
- has perpetual existence, which means that even if a shareholder dies, the company will exist in its own right
Disadvantages of a LTD?
- cannot offer shares to the general public
- profit is distributed to shareholders (limits profit for expansion/reinvestment)
- must file annual accounts
What is a franchise?
When the owner of an established business grants the right to sell their product/service in exchange for monetary consideration.
Advantages for franchisor?
- receive lump sum income on top of a regular agreed percentage of profit
- name of business gets more widely promoted
Advantages for franchise?
- trades under established business name
- has access to network of help and support from franchisor
Disadvantages for franchisor?
- loss of control over operation of business
- reputation can be damaged
Disadvantages for franchise?
- must conform to image and characteristics of franchise
- part of profits must be paid to franchisor
Why do not-for-profit businesses trade?
In order to benefit the community or social purpose for which it was set up.
What is the profit from not-for-profit businesses used for?
Reinvested into the community or used to support principles for which they were formed.
Instead of shareholders, what do not-for-profit’s have?
Trustees who are gaurantors.
What restricts distribution of profit to members of not-for-profits?
Memorandum of Association.
What can not-for-profit’s apply for?
Charitable status.
Why are online businesses attractive for potential owners?
There are very few costs involved and can start with very little capital.
What do lifestyle businesses often start as?
Sole practitioners or partnerships with limited opportunity for growth.
Other than profit maximisation, what are some reasons for setting up lifestyle businesses?
- financial comfort
- flexibility
- quality of life
What are the finances of PLC’s separate to?
The finances of shareholders.
How many shareholders must a PLC have?
At least 2.
A PLC must have issued shares to the value of what before they can trade?
£50,000
How do PLC’s issue shares?
Through stock exchange.
Where must a PLC be registered?
Companies House
Where does a PLC’s finances come from?
Public share issue, debenture issue, borrowings and retained profits.
What must a PLC file?
Annual accounts.
What are advantages of a PLC?
- can obtain very large amounts of capital
- usually dominate market and have extensive asset base, so find it easy to obtain loans
- benefit from Economies of Scale because of their huge size
What are disadvantages of a PLC?
- can get too large and impersonal, causing employees to lose sense of identity and demotivation/communication problems
- small group of directors make all the decisions, which might not be widely agreed within company
- large hierarchical structure works against fast/effective decision making
- hostile takeovers
What are hostile takeovers?
Being unwillingly taken over by another company.
