chapter 4 - types of business organization Flashcards
define sole trader
a business that is owned and controlled by just one person who takes all of the risks and receives all of the profits.
Why would people choose to become sole traders?
for personal reasons such as
- to be their own boss and make their own decisions
- be able to decide when and how many hours to work
- have a business that uses their own skills and interests
what are the advantages of being a sole trader?
- quick and easy to set up a business
- the sole trader makes all the decisions and so has complete control.
- business can often be set up with a small amount of start-up capital.
the owners keeps all the profit.
what are the disadvantages of being a sole trader?
- unlimited liability
- difficult to raise funds to expand the business
- as a small business, it is difficult to compete with larger firms.
- owners might lack some of the essential business skills.
- long working hours.
- if a sole trader dies or retires the business no longer exists.
why are sole traders such a common form of organization?
there are so few legal requirements to set it up.
what legal regulations must sole traders follow?
- the owner must register with, and send annual accounts to, the government tax office.
- in some countries, the name of the business must be registered with the registrar of business names.
- in other countries, it is sufficient to just put the name on all the firm’s documents and to put a notice in the main office stating who owns the business.
- observe laws which apply to all firms in that industry.
define start-up capital
the finance needed when first setting up a business.
define partnership
a business formed by 2 or more people who will usually share responsibility for the day-to-day running of the business. partners invest in capital and share profits.
define partnership agreement
aka deed of partnership
the written and legal agreement between business partners. it is not essential to have, but is recommended.
it sets out the rights and obligations of each partner.
what are the advantages of a partnership?
- greater access to finance
- decision-making is shared and often leads to better decisions
- management and the day-to-day running of the business is shared —> reduced workload
easy to set up - losses are shared between the partners
what are the disadvantages of a partnership?
- unlimited liability
- if one partner leaves, the business ceases to exist or will have to be reformed if other partners want to continue trading.
- partners must share profits
- decisions are binding on all partners, even if they don’t agree to them.
- partners can disagree to on business decisions, and consulting all partners takes time.
- if one partner is inefficient or dishonest, all other partners will suffer.
- number of partners is usually limited to 20.
- fairly small, so still difficult to raise additional finance.
what is a limited partnership?
in some countries it is possible to create a limited liability partnership (LLP).
partners have limited liability, but shares cannot be bought or sold.
what are unincorporated businesses?
sole traders and partnerships.
define unincorporated business
a business that does not have a legal identity separate from its owners. the owners have unlimited liability for business debts.
define unlimited liability
if an unincorporated business fails, the owners will have to use their personal wealth to finance any business debts.
what is a limited company?
an incorporated business
a business that is owned by shareholders.
Private limited company (LTD)
public limited company (PLC)
define shareholder
a person or organization who owns shares in a limited company.
they appoint directors to run the business.
define private limited company
often a small to medium-sized company.
owned by shareholders who have limited liability.
the company cannot sell its shares to the general public.
define public limited company
often a large company.
owned by shareholders who have limited liability.
the company can sell its shares to the general public.
define limited liability
the shareholders in a limited company which fails only risk losing the amount they have invested in the company and not any of their personal wealth.
what are the feature of limited companies (PLC and LTD)
- legal documents: article of association and memorandum of association, must be completed.
- shareholders invest their capital by purchasing shares in the company.
- ordinary shareholders are the owners of the company.
- shareholder have limited liability.
- the business continues even if one or more shareholder dies.
- the company can raise finance by selling shares.
- profit belongs to ordinary shareholders.
- profit is shared between shareholders through the payment of dividends.
- shareholders vote on major decisions taken by the company.
- end of year financial statements must be produced and submitted to the correct authorities.
- the company’s financial accounts are available for the public to look at.
define ordinary shareholders
the owners of a limited company
define dividend
a payment, out of profits, to shareholders as a reward for their investment.
define collateral
non-current assets offered as security against borrowing.
what are the advantages of private limited companies?
- limited liability
- separate legal identities
- better control over the company since there is only a few shareholders
- able to raise funds by selling shares to family and friends
- business continuity even after the death of a shareholder.
what are the disadvantages of private limited companies?
- difficult to sell shares since they can only be sold privately
- shares cannot be sold or transferred to anyone else without the agreement of the other shareholders.
- a lot of legal formalities
- accounts must be available for the public to see.
what are the advantages of public limited companies?
- limited liability
- separate legal identities
- business continuity
- no limit to the number of shareholders
- no restrictions on the selling, buying or transfer of shares.
- high status which would attract suppliers and banks.
what are the disadvantages of public limited companies?
- complicated legal formalities
- many more regulations and strict controls to protect the interests of the shareholders.
- selling shares to the public is expensive.
- loss of control over the business.
- company is always at risk of a takeover.
define annual general meeting (AGM)
a legal requirement for all limited companies. shareholders may attend and vote on who they want to be on the board of directors for the coming year.
define franchise
a business system where entrepreneurs buy the right to use the name, logo and product of an existing business.
what are the advantages of a franchise?
- less chance of business failure.
- the franchisor provides advice and training to the franchisee as part of the franchise agreement.
- the franchisor will finance the promotion of the brand through national advertising.
- the franchisor will have already checked the quality of suppliers.
- banks often willing to lend.
- fewer decisions to be made.
what are the disadvantages of a franchise?
- poor management of one outlet can lead to a bad reputation for the whole business.
- less independence and more strict controls over what the franchisee can do with the business.
- the initial cost of buying into a franchise can be very expensive.
- the franchisor will take a percentage of the profits each year.
- franchisee will still have to pay for any local promotions they decide to do.
define joint venture
2 or more businesses agree to work together on a project and set up a separate business for this purpose.
what are the advantages of a joint venture?
- reduces risk for each business
- cuts costs
- each business brings different expertise to the joint venture
- market and product knowledge can be shared.
what are the disadvantages of a joint venture?
- any mistakes made may damage the reputation of all firms in the joint venture.
- different business cultures or styles of leadership creates disagreements and makes decision making difficult.
- if the new product is successful, then the profits have to be shared.
what is the difference between unincorporated businesses and limited companies?
a limited company is an incorporated business, it has a separate legal identity from its owners. the company and not the owners (shareholders) is legally responsible for the activities of the business. the owners have limited liability for business debts.
what factors determine what type of business organization should be chosen?
- the number of owners
- the owner’s role in the management of the business
- the attitude towards financial risk
- how quickly the owners want to start operating their business
- the potential size of the business
define public corporation
a business organization that is owned and controlled by the state.
what are the advantages of a public corporation?
- some industries are considered to be so important that government ownership is thought to be essential. (water supply and electricity generation).
- ensure that consumers are not take advantage of by privately owned businesses.
- the government ca nationalize important failing businesses, which secures jobs.
- non-profitable but important programmes can still be made available to the public.
what are the disadvantages of a public corporation?
- no private shareholders to insist on high profits and efficiency.
- inefficient since managers will always think that the government will help them if the business makes a loss.
- could be unfair of public corporations receive subsidies but private firms in the same industry do not.
do government ministers control public corporations?
the government does not directly operate the business. government ministers appoint a board of directors, who are given the responsibility of managing the business. the government just makes clear what the objectives of the business should be.
- no competition so lack of incentive to increase consumer choice and increase efficiency.
- governments can use these businesses for political reasons, which prevents it from being operated like other profit-making businesses.
