Chapter 4 Types of business organizations Flashcards
What is a sole trader business
Owned and operated by one person.
Characteristics of a sole trader business
Very mobile
Very cheap to start
Few legal requirements
Advantages of a sole trader business
Complete control over business Freedom to choose holidays and employees Keeps all the profit to himself Easy to exit No extra taxes
Disadvantages if a sole trader business
Unlimited liability
Nobody to discuss decisions with
Need to be multiskilled
Less continuity
2 Types of unincorporated businesses
Sole trader
Partnership
What is a partnership business
Group or association of at least two people who agreed to run a business (max 20 people)
What is a deed of partnership
a legal binding document for the partners.
Characteristics of a partnership business
All the partners contribute to the business - investments or capital.
All the partners will have a say in the running of the business
Advantages of a partnership
Potential for more finance or access to capital
Longer lifespan
Shared workload
Partners can specialize in different tasks
Disadvantages of partnerships
Make all decisions together
Share the profits
Unlimited liability
Types of incorporated businesses
Private Limited Company
Public Limited Company
Characteristics of pvt ltd companies
Shares are private, aren’t offered on a stock exchange
Owned by shareholders - 2 to 200
Advantages of a pvt ltd company
Provide the company with capital when you invest in the company
Longer lifespan of the company
Limited liability
Disadvantages of a pvt ltd company
Can’t offer shares to public
Legal documents signed in a pvt ltd company
Articles of association
Memorandum of association
Characteristics of a public limited company
has an AGM
minimum of 7 shareholders
Shares listed on a stock exchange
What is an AGM
Annual general meeting - All the shareholders are invited in order to elect the next director of the company
Advantages of a public limited company
More capital since more shareholders
Limited liability
Shares are more liquid
Continuity of the company
Disadvantages of a public limited company
Danger to the original owners - can get voted out at the AGM
Legal formalities are very time consuming
Difficult to control since there are so many shareholders
Who is the franchisor
The Franchisor is the original brand/company
Who is the franchisee
the Franchisee is the outlet owner.
Advantages for franchisor
Extra profits
Selling the rights gives profit
Very cheap and quick expansion method
Good marketing strategy
Disadvantages for franchisor
1 poorly managed outlet could lead to a bad brand reputation for all outlets and brand
Advantages for franchisees
Don’t have to advertise - brand building already done.
Don’t have to decide the price, products, etc.
Low chance of business failure
Easy to get loans to set up the shops, because the franchisee is working under a popular brand.
Disadvantages for franchisees
No freedom of production (What to produce, how much to produce, etc).
Don’t get all the profits.
The license fee is very expensive.
Investment for the shop is expensive.
What is a joint venture
Two or more companies agree to form a new child company together.
Advantages of a joint venture
More profit for the parent company
Cost less to set up a new company
The strengths of both companies come together
Local knowledge of 1 company can help with the entry of the other company
Risk is shared between companies
Disadvantages of a joint venture
Parents companies have to share profits.
Conflicts in decision making, etc could occur. The work culture, vision, etc could also conflict.
Why are joint ventures formed
When one company is entering a new market, it may look to form a joint venture with a company that already exists in that market.
What is an unincorperated business
Does not have a separate legal identity.
What is an incorporated business
Businesses that have a separate legal identity.
Who is a shareholder
Owners of a limited company. They buy shares that represent part ownership in a company
