Chapter 2 - Types of Business Entity Flashcards
What are the main types of business entity?
- Sole Trader
- Partnership
- Limited Liability Company
What are four ways in which we can look at or consider a business?
- Commercial or industrial concern - exists to deal in the manufacture, resale or supply of goods and services
- Organisation which uses economic resources to create goods or services which customers will buy
- organisation providing jobs for people
- Invests its money in resources (buildings, machinery, employees) in order to make even more money for its owners.
Define Profit
the excess of revenue (income) over expenditure. when expenditure exceeds revenue the business is making a loss
Define a manufacturing entity
An entity which buys raw materials and uses them to produce finished good which it then sells to customers.
What is a retail entity?
One which buys goods and then sells them to customers. No work is done to the goods. eg. IK or Walmart
What are the five characteristics of a retail entity?
- typically operate from a location where selling takes place (or if online then a warehouse where the goods are)
- Hold large amounts of goods for resale to meet customers needs.
- The cost of goods sold in P&L tends to be high given the amount of goods purchased.
- Have large amounts of trade payables as they will try to buy their goods on credit.
- Have low amounts of trade receivables as most sales will be for cash or card rather than on credit.
True or false. The cost of goods figure for a retail entities P&L tends to be low given the amount of goods purchased.
False. That would mean they have a high markup. rather they have a low markup on many items.
What is a service entity?
a business which provides a service to its customers. eg individual cleaning windows to doctor or accountant.
What are the main characteristics of a service entity? (5)
- Main asset = employees which cannot be represented as a monetary value and is not included on the finances
- Wages and salary = large portion of expenses in the P&L
- Only a small level of goods kept on premises. Only things like stationery.
- Trade payables are low as few goods are being purchased.
- May have large amounts of trade receivables if services are provided on credit.
What is a sole trader? give examples
A type of business entity comprised of an individual who works for themselves. eg. shopkeeper, plumber etc.
The term sole trader refers to the ownership of the business. can have employees
True or false. a sole trader can have employees
True
What is a partnership?
When two or more people decide to run a business together. eg. medical practice, legal practice etc
What is a limited liability company
Incorporated to take advantage of ‘limited liability’. while sole traders and partnerships are personally responsible for the accounts owned by their business, the shareholders of a company are only responsible for the amount paid for their shares.
How are sole traders, partnerships, and companies viewed in the eyes of the law?
sole traders and partnerships are not separate entities from their owners, companies are and can issue contracts from their name.
What are the 5 advantages of trading as a limited liability company?
- investment less risky.
- easier to raise finance as there can be many shareholders
- separate legal identity from shareholders
- Taxed as a separate entity. can be lower than the rate for the individual
- easy to transfer shares from one owner to another.
