1.5.4 Forms Of Business Flashcards
What are the different forms of businesses
Sole trader
Partnership
Private limited company
Public limited company
Describe sole traders
- An individual who owns and runs their own business
- Registered as self-employed with Her Majesty’s Revenue and Customs (HMRC)
- Legally required to keep a record of all income and expenses and at the end of the tax year to fill in a self assessment tax return for HMRC
- Profits made by the sole trader are classed as income and are therefore taxable through income tax
- A sole trader has unlimited liability
- This means that they are personally responsible for all debts run up by the business
- Therefore, their home and all of their assets might be used to pay off any debts that they may incur and are unable to pay
Sole trader benefits
- Cheap and easy to set up
- All profits go to the sole trader
- Autonomy in decision making
- Financial records remain private
- Motivation is high as the success of the individual and the business are one and the same
Sole trader disadvantages
- Unlimited liability
- Limited capital for investment
- Little specialist skills as the owner is a ‘jack of all trades’ or will have to buy in specialists
- Difficult to find cover when ill – although sole traders often do employ people
Describe partnerships
●A partnership is where two or more people share the costs, risks and responsibilities of being in business together
●As with a sole trader, each partner has to register as self employed with HMRC and will have unlimited liability
●Traditionally partnerships have had unlimited liability
Each partner in the partnership has
●is equally responsible for debts incurred
●will take a share of the profits made by the business
●has a share in the decision making
●normally contributes to the management of the business but can delegate responsibility
Partnership benefits
- Risks, costs and responsibilities are shared
- More scope for specialist skills
- Simple and flexible
- Financial records remain private
- More capital can be raised than as a sole trader
Partnership disadvantages
- Unlimited liability
- Arguments can occur with decision making
- If a partner dies, resigns or goes bankrupt the partnership is dissolved
- Trust becomes a significant element between partners – a written agreement between the partners should be drawn up
Describe limited company’s
- Limited companies exist in their own right
- The owners and the company are separate legal entities
- Therefore, the company’s finances are separate from the owner’s personal finances
- Shareholders are the owners of limited companies
- They have limited liability and are not responsible for the company’s debts
- They can only lose the money that they have invested in the business in the form of shares
Companies must be registered at Companies House.
Companies must send to the Registrar of Companies the following:
- A Memorandum of Association – name, registered office and what the company will do
- Articles of Association – the rules for running the company
- Form 10 – details of directors and company secretary
- Form 12 – declaring that they comply with company law
Describe private limited company’s
- Have Ltd. after the name
- Owned by shareholders who are known to the company, often family and friends
- Can only sell shares on to other shareholders i.e. they can not sell them openly on a stock exchange
- This means that shares are often sold at a discount to the real value of the shares because the shareholders are ‘locked in’ and either sell at the price that they are offered, or do not sell at all
Private limited company’s advantages
- Limited Liability
- Separate legal identity
- More flexible than a Plc.
- Financial records remain relatively private
- More capital can be raised through the sale of shares
Private limited company’s disadvantages
- More complex to set up due to increased legal requirements
- Some loss of control as shareholders have voting rights
- Unable to sell shares to the public
Describe franchising
- A franchise is when one business, the franchisor, gives another business, the franchisee, permission to trade using the franchisors name and selling the franchisors goods or services
- Can be seen as a less risky option for business start-ups but can mean additional costs and a loss of independence
- A franchisee is a business that is given permission from another business to trade using its name or goods/services in return for a fee and share of the profits
- The franchisee will also be given support by the franchisor but will have less autonomy in decision making
- A franchisor is a business that sells a licence giving permission to another business to trade using its name or goods/services
The British Franchise Association (BFA) suggest six steps to follow when forming a franchise:
Step 1: Join the BFA – 61% of new franchises belong to this organisation
Step 2: Ensure that you have the necessary finances available
Step 3: Do you have the personal skills to do well in the industry you choose e.g. customer based businesses require people skills
Step 4: Research the market – is there growth or saturation
Step 5: research the franchise
Step 6: be sure , last between 5 and 20 years
