business ownership Flashcards
what are the types of business ownerships?
- sole trader
- partnership
- private limited
- public limited
what is sole trader?
an individual who owns and operates a business on their own
what are the characteristics of a sole trader?
- unlimited liability
- keep all profits
- full control
- easy to set up
what is unlimited liability?
if business fails the owner/s are liable for all business debts
LOA- benefit of being a sole trader
-sole traders are the only owners of a business
- therefore they can maintain full control over day to day running
- maintain consistency throughout the business
- build a strong brand image
- differentiate from competitors
- increase prices without a significant fall in demand
- increase in revenue
- increase in gross profit margins
- increase in retained profit to reinvest
LOA- drawback of sole traders and partnerships
- unlimited liability
- increased risk of investment
- if business debts exceeds business assets
- may need to sell personal possessions
- this increased risk will make investment less attractive
- leading to reduced investment
- less capital
- reduced assets
what are the characteristics of a partnership?
- unlimited liability
- shared responsibility
- easy to set up
- two areas of expertise
- may have disputes
- have to split profits
LOA- benefit of operating as a partnership
- knowledge and expense from the partners
- look in case study and input knowledge and experience here
- improved innovation
- differentiation ( specify how)
- increase price
- without significant fall in demand
- increase gross profit
- increased operating profit
what is a partnership?
a business where two or more individuals share the ownership and operation of a business
what is a private limited company?
a company that can choose its own share holders
what are the characteristics of an LTD?
- limited liability
- shares sold privately
- (LTD) gives business better reputation
- less capital compared to PLC
what is limited liability?
if the business fails the owner only loses the amount initially invested
what are the characteristics of a PLC?
- limited liability
- goes through stock market flotation
- easily raise capital
LOA- benefit of operating as an LTD
- private limited companies can choose their own shareholders
- choose people who match their objectives (e.g passion for innovation)
- might mean less focus on short term results as they share goals on r&d and long term investment
- can reinvest more capital into r&d/ growth rather than being pressured to pay dividends
- able to innovate and pursue objectives
- differentiate from competitors in the long term
LOA- drawback of operating as an LTD
- private limited companies are unable to sell their shares in the stock market
- this can make it more difficult to raise large amounts of capital
- so the business may find it difficult to build scale
- limits amounts of r&d
- less innovation
- less differentiated products
LOA- benefit of operating as a PLC
- have gone through stock market flotation
- therefore their shares are advertised to and accessible to the public
- due to this they can sell a large volume of shares leading to a significant amount of capital being generated
LOA- drawback of operating as a PLC
- public limited shares are sold to the public
- therefore they is more pressure form the share holders for short term profits
- so the business may neglect long term objectives for short term returns
- to satisfy shareholders by using profit to pay regular dividends
- neglecting investment into r&d to develop innovative products
- profit becomes less differentiated long term
LOA- benefit of limited liability
- limited liability means that owners are not responsible for any debt that cannot be paid by the business
-this therefore attracts more investment as there is a reduced risk
-leading to an increase in capital invested in the business - the business can build capacity ( say how from case)
- improved accessibility ( service) or output ( factory)
- increased opportunity to sell more goods
- increased sales revenue
- increased gross and operating profit
LOA - drawback of limited liability
- the owners are not risking personal possessions
- so if the business is unable to pay through sale of assets
- then the supplier of bank lose the amount owed
- this increases the risk of lending cash to the business
- or increase the risk of offering trade credit
- making banks and suppliers less likely to lend
- struggle to get a trade credit or a loan
- limited expansion
what is a franchisor?
a company that has an established brand and business model and offers others an opportunity to operate under its brand name and system
what is a franchisee?
an individual or company that enters into an agreement with the franchisor to use their brand and business model to operate a business
LOA- benefit of becoming a franchisor
- becoming a franchise means allowing independent businesses to use your brand name
- this means that the franchisee provided the capital to open new branches/ stores
- therefore reducing capital required for expansion
- leading to the franchisor being able to expand much quicker
- able to increase marketing budget and advertise more
- able to build a stronger brand
LOA- drawback of becoming a franchisor
- however franchisors risk damaging their brand reputation
- as the franchisor is not responsible for the day to day running of the outlet
- the franchisee may fail to uphold high levels of customer service
- due to lack of supervision from franchisor
- poor customer service in one ohtlet could affect rep of others
- meaning customers may switch cot rivals
- reducing sales rev
- reducing gross profit
LOA- benefit of becoming a franchisee
- becoming a franchisee means paying to use another businesses brand name
- this means they already have access to a well know brand
- therefore there are already customers who have brand loyalty
- the franchisee can charge higher prices than independent businesses as customers will be willing to pay them
- leading to increased revenue and profit margins
- more retained to reinvest into opening further franchises
LOA- drawback of becoming franchisee
- becoming a franchisee means to use another businesses brand name
- Will lead to higher costs as fees and royalties will need to be paid
- therefore leading to increased cash out flows
- lower net cash floe
- possibly reducing cash reserves
- unable to pay day to day bills such as rent / suppliers
- forced to sell non current assets in order to pay bills
- unable to operate
