Booklet 3 : Forms of Business Ownership Flashcards
Define a sole trader, and name three advantages and three disadvantages (8)
A sole trader is a business entity that is owned and cont by one individual (2)
Advantages
1. Profits - all profits earned by the trade are kept for themselves
2. Low start up costs - easy to set up and inexpensive meaning they can start trading almost immediately
3. Control - a sole trader makes all the decisions and gets to be their own boss
Disadvantages
1. Unlimited liability - if a sole trader incurs large debts, and becomes bankrupt, the sole trader is personally responsible for this meaning that their personal possessions can be taken to pay the debt
2. Raising capital - banks are reluctant to lend money as sole traders are seen as risky
3. Workload - sole traders are responsible for the business meaning they have to work long hours and holidays are restricted
Define a partnership, and state three advantages and three disadvantages (8)
A partnership is when 2-20 people share ownership of the business, there is shared responsibility and a large expansion of finance (2)
Advantages
1. Raising capital - banks are more willing to give out loans as there are multiple people involved meaning they are less risky
2. Shared workload - multiple people responsible for the business with different expertise
3. Shared decision making - partners can discuss a problem concerning the business, and resolve the issue
Disadvantages
1. Unlimited liability - if a partnership incurs large debts and becomes bankrupt, the partners are responsible for this, therefore each partner’s personal possessions are at risk
2. Partner conflict - partners may hold different views on the business, this can lead to disagreements amongst owners
3. Slow decision making - all partners have to be consulted before a final decision
Define a limited company (2)
A business that operates as a separate legal entity from its owners (shareholders). The company is managed by a Board Of Directors who may also be shareholders. The shareholders have limited liability. (2)
Define a private limited company, state three advantages and three disadvantages of an LTD (8)
An LTD are small/medium sized companies, they are not listed on the stock exchange meaning they cannot share their general shares to the public only to family and friends. (2)
Advantages
1. Limited liability - shareholders are not responsible for any debts of the company, they only lose money invested not their personal possessions
2. Raising capital - shares can be sold and there is no limit on the number of shareholders
3. Specialisation - there is a great number of directors who have different areas of expertise
Disadvantages
1. Restrictions on raising capital- shares cannot be sold on the stock exchange only to family and friends, meaning that it is harder to raise capital
2. Lack of privacy - financial statements are published online and competitors can inspect them
3. Setup costs - setup costs can be time-consuming, solicitor fees are high in order to deal with legal procedures
Define a public limited company, and state three advantages and three disadvantages (8)
This can occur as an LTD grows where the directors decide to transition to a PLC which involves the process of stock market listing. (2)
Advantages
1. Limited liability - if the company has large debts, shareholders are only liable for the amount of shares they have invested in and their personal possessions are protected
2. Raising capital- shares can be bought on the stock exchange, therefore large amounts of capital can be raised easily
3. Economies of scale - due to the size of a PLC, companies can buy in bulk and sell goods cheaper per unit
Disadvantages
1. Set-up costs - it is much more complicated compared to setting up an LTD, usually a PLC needs £50,000 to start up
2. Privacy - financial statements are published online, interested parties and competitors can inspect them
3. Threat of takeover - since shares are sold on the stock exchange there is a threat a business could be taken over if the investor has the available finances
Define a franchisees, and state three advantages and disadvantages of it (8)
The legal entity that buys the license to trade from the franchisor and pays annual fees to use the company name (2)
Advantages
1. Well-known brand - the franchisee knows what they are buying is a established, profitable business which attracts sales and large amounts of profits
2. Defined territory - usually franchises operate in different geographical areas meaning they won’t compete against each other
3. Access to finance - banks consider franchises low-risk and are willing to loan to franchises for growth and investment opportunities
Disadvantages
1. Fees to franchisor - the franchisee must pay an initial up-front fee for using their brand name and an agreed percentage profits annually
2. Loss of control - the franchisor has a major say in the running of the business and each franchisee receives strict guidelines how to follow the rules
3. Interdependency - the negative actions of other franchises operating within the same brand can affect the reputation and profits of others
Define a franchisor, and state three advantages and two disadvantages of this (7)
A franchisor is a legal entity that grants the license to the franchisee in return of an annual fee (2)
Advantages
1. Growth opportunities - franchising the business allows them to expand much quicker than grown organically, without having to invest money
2. Profits - with additional finance the profits automatically increase due to license fees and annual royalties
3. Administration - administration is minimal, as each franchisee is liable for their own business administration
Disadvantages
1. Loss of control - although franchisors have some control over franchisees, it is the franchisee that manages the day to day running of the business
2. Diseconomies of scale - if the franchisor attempts to issue too many licenses and grow too quickly, it will become more difficult to control and co-ordinate staff
Define a social enterprise and state three advantages and three disadvantages (8)
A social enterprise is a business with the objective to give back to society so all profits are invested back into the business to provide jobs to young people and those in need (2)
Advantages
1. Profits for change - profits are given back to social organisations in order to make a positive social change
2. Better corporate image - there is an increase of desire from the public when they see businesses driven to make profit for change
3. Increased employee motivation- employees feel proud that the work they are doing is making a difference
Disadvantages
1. Raising finance - no shares can be sold, therefore it is difficult to raises finance
2. Profits - the owners keep very little of the profits they make, as they put most of the money back into the business
3. Dependency of funds - the amount of funds available is dependent on the amount of funds raised
Define the voluntary sector (2)
The voluntary sector refers to those businesses whose primary purpose is to create a social impact rather than profits (2)
Define a charity, and state three advantages and three disadvantages (8)
A charity must have a charitable aim e.g relieve poverty, homelessness or drug addiction, a charity cannot have owners or shareholders. (2)
Advantages
1. Charity work - the sole aim is to make profits and invest them back into their aim
2. Lower costs - charities tend to receive voluntary workers in store so they don’t have to pay wages
3. Wide range and cheaper products - charities sell second-hand goods at low prices making it more affordable to consumers
Disadvantages
1. Dependency on funds - the amount of funds available depends on the amount of funds raised
2. Expenses- many charities have high salaries for executives and office jobs, travel costs may have to be paid for volunteers
3. Lack of privacy - annual submission of financial statements to the Charity Commission are essential
