Chapter 22- Forms of Business 1 Flashcards
Sole Trader
Simplest form of business organisation – there is one single owner, but can employ any number of people – sole traders can be involved in a wide range of business activity – in the primary sector, they may be farmers or fisherman, in the secondary sector, they may be small building or manufacturing businesses – however most sole traders will be found in the tertiary sector – many of these are retailers running small shops.
• They must pay income tax and National insurance contributions
• Once turnover reaches a certain level, they must register for VAT
• They may need planning permission
• Unlimited Liability – this means that if the business fails they can
lose more money than what was originally invested – this is
because a sole trader can be forced into personal wealth
Sole Trader advantages
- owner keeps profit
- business is independent and the owner has complete control
- the business is simple to set up, with no legal requirements
- the business can be flexible and can adapt to change quickly
- the business can offer a personal service because it is small
- the business may qualify for government help
Sold Trader disadvantages
- owner has unlimited liability
- the owner may struggle to raise finance, as lenders may consider them
too risky to offer credit - independence may be a burden, for example if an owner is ill
- the owner and any employees are likely to work very hard, with long hours
- the business is usually too small to exploit economies of scale
- the business will have no continuity if the owner passes away
Partnership
Same as sole trader but with more than one owner – the joint owner will share responsibility for running the business and also share the profits – partnerships are often found in professions such as accountants, doctors and estate agents.
There are no legal formalities to compete when a partnership is formed – however partners may draw up a Deed of Partnership – this is a legal document which states partners rights in the event of a dispute: It covers issues such as:
- How much capital each partner will contribute
- How profits will be shared amongst the partners
- The procedure for ending the partnership
Partnership advantages
- The partnership is easy to set up and run, with no legal formalities
- partners can specialise in their area of expertise
- partners share the burden of running the business
- more owners can raise more capital
- the partnership does not have to publish financial information
Partnership disadvantages
- partners have unlimited liability
- partners have to share the profit
- partners may disagree and fall out with one another
- one partners decision is legally binding on all other partners
- partnerships have limited growth potential
Private limited companies
A limited company has a separate legal identity from its owners – the company can own assets, form contracts, employ people, sue people and be sued.
• Business name ends in Limited or LTD
• Shares can on be transferred privately between family and friends. All
shareholders must agree on the transfer and they cannot be
advertised for sale.
• Often family business owned by family member and close friends.
• Small to medium size business
• Directors have ‘hands on’ approach to running the business.
Advantages of PLCs
• Shareholders have limited liability
• More capital can be raised by issuing shares.
• Control over business cannot be lost to outsiders/less likely to be
taken over by other companies.
• Owners may pay less tax than that of a sole trader or partnership.
• Considered to have a higher status than some other types of business
organisations such as sole trader.
• Easier to expand because you have greater access to funds/money.
Disadvantages of PLCs
- Have to publish financial info.
- Setting up costs have to be met.
- Paper work more complex
- Profits are shared between more members.
- Takes time to transfer shares to new owners.
- Cannot raise large amounts of money like public limited companies.
Franchising
a business model in which a business (the franchisor) allows another operator (the franchisee) to trade under their name.
In the UK there are a number of large franchise operations including Dairy Crest, Dominos and Subway
The franchisor provides a variety of services
- It gives the franchise a license to make a product which is already tried
and tested in the market place
- The franchisor provides a recognised brand name which customers
should recognise and trust – this helps generate sales from the
moment the franchise starts trading - The franchisor will provide a start-up package – this will include help
and advice about setting up the business – the franchisor might
provide the equipment to start the business - Many franchises operate exclusive area contracts – this is where on
franchise is guaranteed that no franchise deal will be signed with
another franchise to operate in a particular geographical area – this
prevents competition between franchise and so helps sales
In return for these services:
- There will be an initial start-up fee – cover cost of equipment etc.
- Most franchisors charge a percentage of sales for ongoing
management services and the ongoing right to use the brand name - Franchisors will also make a profit on the supplies they sell directly the
their franchisors
Advantages to the frashisee
- franchises are lower risk, as they use an idea that has already been tried
and tested - franchisees get support from the franchisor
- the set up costs of a franchise are predictable
- Franchises can benefit from national marketing campaigns organised by
the franchisor
Disadvantages to the franchisee
- A franchisee’s profit is shared with the franchisor
- Franchisees have to sign contracts with franchisors, which can reduce
independence - setting up a franchise can be an expensive way to start a business
- Franchisees lack independence and must abide by strict operating rules
Advantages to the franchisor
- Franchising is a fast method of growth
- Franchising is a cheaper method of growth because franchisees take
some of the financial risk - Franchisees take some of the risk on behalf of the franchisor
- Franchisees are more motivated than employers
Disadvantages to the franchisor
- potential profit is shared with franchisees
- poor franchisees may damage the brand’s reputation
- franchisees may get their merchandise from elsewhere
- the cost of supporting franchises may be high
Social Enterprises
a business that trades with the objective of improving human or
environmental well-being - e.g. charities and workers co-operatives
