Chapter 2 Flashcards
Term
Definition
Sole Trader
An individual who owns and runs a business alone. Sole traders may work alone or employ others. Examples: painters, hairdressers, tailors, freelance workers. Sole traders often use personal savings to start their business.
Advantages of Sole Traders
- Easy to set up.
- All profits go to the sole trader.
- Complete control (being your own boss).
- Privacy (not required to publish financial information).
- Quicker decision-making.
Disadvantages of Sole Traders
- Unlimited liability (owner responsible for all debts).
- Limited sources of finance.
- Workload and stress.
- Limited skill sets.
- Lack of continuity (business ends if the owner dies).
- Potentially higher personal income taxes.
Unlimited Liability
A legal condition where the owner is personally responsible for all debts and liabilities of the business.
Partnership
A business owned by two or more individuals. Partners pool personal funds and share responsibilities, risks, and profits. Governed by a partnership agreement.
Deed of Partnership
A legal document outlining roles, responsibilities, profit sharing, and procedures for partners in a partnership. Details include:
- Capital contributions.
- Profit and loss distribution.
- Rules for admitting or withdrawing partners.
- Partnership termination procedures.
Advantages of Partnerships
- Easy to set up.
- Greater access to finance (pooled resources).
- Shared workload and management.
- Financial privacy (not required to publish financial statements).
Disadvantages of Partnerships
- Unlimited liability for all partners.
- Lack of continuity (partnership dissolves if a partner leaves).
- Binding decisions (all partners are liable for decisions made).
- Lengthy decision-making due to potential disagreements.
Limited Liability
A condition where personal assets of owners are protected; only business assets are at risk.
Limited Companies
Businesses owned by shareholders and recognized as separate legal entities. Shareholders enjoy limited liability. Two types: privately held and publicly held companies.
Privately Held Companies
Shares are owned by friends, family, or close associates. Shares cannot be traded publicly without permission. Advantages: Controlled ownership. Disadvantages: Limited capital-raising options.
Publicly Held Companies
Companies that sell shares on public stock exchanges without requiring shareholder permission. Advantages: Ability to raise significant capital. Disadvantages: Legal and financial disclosures, fluctuating share prices.
Triple Bottom Line
For-profit social enterprises focusing on three objectives:
- Environmental: Protecting ecological balance.
- Social: Providing social gains for communities.
- Economic: Generating profit to sustain operations.
Cooperatives
Businesses owned and democratically operated by members for mutual benefit. Types include:
- Retail/Consumer: Customer-owned, profits shared as discounts or payouts.
- Agricultural: Farmers pooling resources.
- Worker: Employee-owned manufacturing businesses.
Non-Governmental Organizations (NGOs)
Non-profit groups independent of governments, addressing social, environmental, and humanitarian issues. Examples include charities, advocacy groups, and community organizations.
Charities
Organizations raising money to support causes or people in need. Characteristics:
- Mission-driven.
- Non-profit status.
- Surplus reinvested in cause.
- Main income: donations.
Factors Influencing Ownership Structure
Key considerations include:
- Objectives (profit, non-profit, essential services).
- Control desired by owners.
- Transparency level required.
- Global market competition.
- Flexibility and speed of decision-making.
