Choosing a Legal Structure

Question 1

what is meant by flotation?

Answer 1

Flotation is the process of changing a private company into a public company by issuing shares and soliciting the public to purchase them

Question 2

name the 5 different types of structures that can be used when starting up a business?

Answer 2

• Sole traders
• Partnerships
• Private companies
• Public limited companies
• social enterprise

Question 3

What can shareholders lose when there is limited liability?

Answer 3

only lose the value of their investment

Question 4

limited liability is important for….

Answer 4

protecting shareholders in a company

Question 5

What does limited liability not protect against?

Answer 5

• wrongful or fraudulent trading

- when personal guarantees have been given by directors

Question 6

What is the most common type of business structure?

Answer 6

Sole traders

Question 7

what is a sole trader?

Answer 7

an individual owning a business on his/her own

Question 8

a sole trader can employ people but…

Answer 8

the employees do not share ownership

Question 9

What is a sole trader responsible for?

Answer 9

responsible for all debts. They have unlimited liability

Question 10

Adv of a sole trader?

Answer 10

• quick and easy to set up(business can always be transferred to a limited company)
• simple to run/ owner has complete control
• easy to close / shut down
• minimal paper work

Question 11

Dis Adv of sole traders?

Answer 11

• unlimited liability
• harder to raise finance / often have limited funds
• pay more tax
• if owner is ill business suffers

Question 12

what is meant partnership?

Answer 12

where a business is started and owned by more than one person

Question 13

what legal partnership agreements may there be?

Answer 13

• how profits are shared
• what the partners have to invest into a business
• how decisions are taken
• what happens if partners want to leave or die

Question 14

what type of liability is partnership?

Answer 14

unlimited liability

Question 15

Adv of partnership?

Answer 15

• quite simple
• business benefits from expertise of more than one person
• partners can provide specialist skills
• greater potential to raise finance / each partner provides investment
• minimal paperwork

Question 16

Dis Adv of partnership?

Answer 16

• unlimited liability
• a poor decision by one partner damages the interest of another
• complicated to sell or close

Question 17

limited companies are…

Answer 17

separate legal entities to the founders

Question 18

what can a legal entity do or have?

Answer 18

• can own things e.g assets

- can sue or be sued

Question 19

who are limited companies owned by? who are they run by?

Answer 19

Owned by SHAREHOLDERS

Run by DIRECTORS

Question 20

Shareholders own a ………. of the company but …………..

Answer 20

Shareholders own a share of the company, but they do not own the assets of the company

Question 21

Shareholders are not

Answer 21

liable for debts of the company

Question 22

who is responsible for the debts in a limited company?

Answer 22

Only the company pays off debts

Question 23

What is an asset?

Answer 23

an item of property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

Question 24

who owns assets in a Limited company?

Answer 24

the company

Question 25

Whats the most common type of Limited company?

Answer 25

Private limited company (ltd)

Question 26

what is meant by a private limited company?

Answer 26

means the shares of the company are not traded publicly on a stock exchange

Question 27

What does a public limited company tend to have and what happens to its shares?

Answer 27

tend to have a larger value of share capital and it shares may be traded publicly

Question 28

Adv of limited companies?

Answer 28

• limited liability / protects the shareholders
• easier to raise finance through the sale of shares
• stable form of structure / business continues to exist even when shareholders change
• cant pay less tax

Question 29

Dis Adv of Limited companies?

Answer 29

• greater admin costs

- public disclosure of company information

Question 30

why are non profit organisations set up? what are their aims?

Answer 30

to help the community

- have social aims such as job creations and providing community services

Question 31

what different type of social enterprise is there?

Answer 31

• community development trusts
• housing associations
• sport clubs

Question 32

What legal structure may a business want to choose if maximizing profit is the main objective?

Answer 32

public limited company will help a business grow quickly

Question 33

If an entrepreneur is investing a significant capital into a start up or if a business will have large debts,what liability should he choose?

Answer 33

Limited liability