3.2 Types of business organisations

Question 1

what is a sole trader

Answer 1

when 1 person owns and runs a business

Question 2

what are the advantages of a sole trader

Answer 2

• quick and easy to set up
• the owner gets to receive all of the profit made
• owner makes all decisions about the company

-the financial results do not get posted publicly

Question 3

what are the disadvantages of a sole trader

Answer 3

• unlimited liability (the owner is fully responsible for any business debts)
• there is only one person to make the decisions and there is no one there to prevent making costly mistakes
• if the owner is unwell the work still has to be done on time which could be difficult for the owner

Question 4

What is a partnership

Answer 4

when the ownership of a business is shared by 2-20 people.

Question 5

what are the advantages of a partnership

Answer 5

• partners can specialise
• there are no legal formalities that must be completed
• workload is shared
• people to help in decision making to help avoid making costly mistakes

Question 6

what are the disadvantages of a partnership

Answer 6

• disagreements could be make in decision making which could make the process longer
• all the profit is shared
• unlimited liability so all partners share equal responsibility in all debts

Question 7

what is the partnership act (1890)

Answer 7

the relevant legislation in forming a partnership that states that profits and losses will be shared equally

Question 8

what is a limited company

Answer 8

business owned by its shareholders, run by its directors. limited companies have limited liability for their debts

Question 9

what are the advantages of a limited company

Answer 9

• limited liability meaning if the company fails they can lose no more than how much they have invested into it
• they have a separate legal entity so if legal actions were to take place on the business would be in loss and not the owners

Question 10

what are the disadvantages of a limited company

Answer 10

• lots of paperwork has to be filled out
• more costly to form a limited company
• all of the companies annual financial accounts have to be public

Question 11

what are the different types of sources of finance

Answer 11

• internal sources of finance
• external sources of finance

Question 12

list some examples of internal source of finance

Answer 12

• retained profits
• tighter credit control
• tight inventory control
• delay paying trade payables

Question 13

explain what is meant by retained profits

Answer 13

when you use the profits made from the business and reinvest them into your business

Question 14

list 3 advantages and disadvantages of retained profits

Answer 14

advantages
- increases stock values which makes it look better on the market
- no interest because its your own money
- flexible as the management has full control
disadvantages
- you might not be able to make enough profit in the first year or two to be able to fund it back in
- danger of having too much cash
- sometimes debt is a good solution for a profitable business to boost their momentum

Question 15

explain what is meant by tighter credit control

Answer 15

tighter credit control ensures the customers pay on time/ earlier by giving them discounts or even adding interest on late payments

Question 16

list 3 advantages and disadvantages of tighter credit control

Answer 16

advantages
- quicker payments
- raise more money from the interest
- saves time and money as less time/money is spent on chasing customers around
disadvantages
- need to be careful with the discounts and too many could lead to a loss
- customers may still not pay fully
- could lose some customers if they don’t agree with the policy

Question 17

explain what is meant by having a tighter inventory control

Answer 17

holding a limited amount of stock

Question 18

list 3 advantages and disadvantages of having a tigher credit control

Answer 18

advantages
- less money spent on where the stock is kept as there isn’t as much stock being kept
- less storage space required
- release more cash
disadvantages
- if stock doesn’t arrive in time of an order it could cause problems
- it could make the company unprepared for sudden increases in demand
- the customers may want the stock straight away but you don’t have the full stock. this could make you lose customers/ money

Question 19

explain what is meant by delaying payments to trade payables

Answer 19

delaying the payments you owe someone for as long as possible when you purchase from them on credit

Question 20

list 3 advantages and disadvantages of delaying payments to trade payables