chapter 15 ownership options Flashcards
sole trader
This is a business set up, owned and run by one person. There is no outside control.
It suits people setting up a small business who want to keep it small and own and control it themselves.
There are no legal procedures to be followed in setting up unless the name to be used is different to the owners name.
Eg, farmers, local pubs, hairdressers
Advantages of sole trader
1 Easy to set up- few legal registration requirements, no government permission required
2 Keep all the profits- entrepreneur owns the business alone and keeps all profits, provides motivation to work hard, entrepreneur is directly rewarded for their effort
3 Confidentiality- the financial accounts (Profit and Loss A/C and balance sheet) do not have to be published
4 Can make decisions quickly- no time is wasted having discussions with others
Disadvantages of sole trader
1 Unlimited liability- if the business goes bankrupt and owes a lot of money, the sole trader is responsible for paying back all the firm’s loans. If after selling the business and debts are still owed, they will sell their own personal assets eg house, car. Huge risk if business fails.
2 No continuity of existence- when the sole trader dies the business ends
3 Difficult to run a business on your own- the sole trader must rely on themselves to know everything that is needed. No one to help with problems or decisions.
4 Difficult to raise all the money needed- capital needed to set up and run the business. Difficult to get loans from banks because sole traders are the business organisation most likely to go bankrupt
5 Requires a lot of effort- demanding to run a business alone. The stress from this pressure may cause burn out.
6 Income tax- sole traders pay PAYE on their profits which can go up to 55%
Partnership
This is a business set up, owned and managed by 2-20 owners. They combine their resources and talents to make a profit. eg, solicitors, accountants.
The partners may choose to draw up their own set of rules- The deed of partnership. If not, then the Partnership Act 1890 is applied.
The Deed of Partnership
Sets out how profits will be shared, what each partner is expected to do, what happens if the business closes, salaries etc. If a partner breaches the terms, the others can sue him for breach of contract.
Advantages of partnership
1 Simple to set up- few legal registration requirements, advised for partners to draw a contract called deed of partnership
2 More capital- this is because there are more people setting up the business. As a result of this, more capital is available to pay for the costs of setting up and growing the business. Each partner contributes some capital, so the business can raise more money than a sole trader.
3 Different skills- each partner has a different set of talents and qualities making it easier to run the business as they can divide the work between them. More people to consult with and discuss problems with. Better decisions than someone on their own.
4 Confidential- the financial accounts ( P&L, balance sheet) do not have to be published.
Disadvantages of partnership
1 Unlimited liability- if the business goes bankrupt and owes a lot of money, the partners are jointly liable for paying back all the loans. Partners may have to sell personal assets if debts remaining after selling the business. If one partner cannot repay the share of loans, the other partners will pay for them.
2 Decision making is slower- because all partners must be consulted. Makes the business less flexible and less responsive to changes in the market. Lots of time spent debating new opportunities, someone else may have already exploited the opportunity.
3 Profits must be shared- between partners in their agreed profit-sharing ratio and not in the ratio of effort put in.
4 Not a separate legal entity- if any legal issues arise, each partner is personally sued and not the business.
5 No continuity of existence- if a partner dies or resigns, the entire partnership must be dissolved.
6 Income tax- partnerships pay PAYE on their profits which can go up to 55%
Private Limited Company
This is a business compromising of between 1 and 149 people called shareholders. In Irish law a Ltd has its own legal identity separate from its owners. So the company makes the contracts, sues and is sued, not the people. Money contributed to the firm by shareholders is called share capital. In return for investing in the business, shareholders receive a share of profits called a dividend. They also have a vote at the AGM. Shareholders have limited liability, they will only lose the amount they invested, no personal assets.
Advantages of private limited company
1 Limited liability- if the firm goes bankrupt and owes a lot of money, the shareholders are not personally liable for repaying. No risk of losing personal assets, they only lose the amount they invested.
2 Easier to raise capital- because more people (up to 149) are putting money in the business. The business can raise more money to set up and expand than a sole trader could.
3 Workload can be split- between the people involved in running the business, they are known as directors. Each director has different skills and talents. This can yield better decisions and ideas than a sole trader.
4 Pay less tax- Ltd companies pay the tax that is charged to their profits, known as corporation tax. The rates are very low in Ireland- 12.5%.
5 Continuity of existence- if the owners of the company die, it does not cease to exist. Once it is legally established it can continue to operate unless it goes bankrupt.
Disadvantages of private limited company
1 Complicated to set up- must first apply for permission from the Registrar of Companies. The business cannot begin trading until it shareholders receive a Certificate of Incorporation from the registrar. They must also pay a fee for this service.
2 Lack of confidentiality- The company must publish its financial accounts each year. Customers, competitors and employees can see the company’s financial position and may use the information to their advantage.
3 Many legal requirements to obey- each year the company must send an annual return to the Companies Registration Office. Every year the company must get its financial accounts audited (verified by an independent accountant). This all takes time, effort and money.
