Different Types of Businesses Flashcards
What is a sole trader?
A sole trader is a business which one person provides the permanent finance and, in return, has full control of the business and is able to keep all of the profits
Sole Trader - Advantages
1 It is very quick and easy to set up. 2 It is not necessary to have a lot of capital to start – it may not be necessary to borrow money. 3 A sole trader is their own boss. 4 Decisions can be made quickly. 5 All profits are kept by the sole trader (after tax). 6 The business affairs are kept private. 7 There is a great deal of job satisfaction from running your own business.
Sole Trader - Disadvantages
1 Sole traders often have to use their own money to start up the business. This may limit the amount of capital that can be invested in the business. 2 There is unlimited liability – if the business goes bankrupt, and owes a lot of money, the sole trader may have to sell everything they own. 3 Sole traders often work long hours. Taking a holiday will affect income. 4 The range of skills of a sole trader will be limited 5 Working on your own could be boring or lonely.
What is a Partnership?
A partnership is a business formed by two or
more people to carry on a business together,
with share capital investment and, usually,
shared responsibilities
Partnership - Advantages
1 Partners take a share of the responsibility,
which is less stressful than a sole trader,
who takes total responsibility.
2 One of the main advantages of partnerships
is that each partner can be a specialist in
their area of expertise.
3 Another main advantage is that the ideas
and resources are shared which means that
there should be a greater capacity to solve
problems in the business.
Partnership - Disadvantages
1 Partnerships have unlimited liability.
2 Partners are also jointly and legally
responsible for the actions of each other. If
one partner makes a mistake, the whole
partnership is responsible for putting it
right.
3 Decisions may take longer to make as there
are more bosses, and there may be more
disagreements.
4 The profits will have to be shared out
between the partners.
What are the differences from limited companies and non-limited companies such as sole traders?
1 A company is incorporated – it is a separate legal entity from its owners.
2 It has limited liability, so the owners only stand to lose the money they have invested in the company, no matter how large the debts are.
3 A company has a memorandum of association.
4 It has an article of association.
5 It is owned by shareholders who have bought shares in the company. A company is run by the directors who are paid employees.
Limited Companies - Advantages
1 The main advantage of limited companies is that the owners (shareholders) have limited liability. The shareholders can only lose the money they paid for the shares. If the business goes bankrupt, the owners’ personal possessions are safe. 2 Unlike a partnership, a company can continue trading after the death of the owners, because it has been incorporated. 3 The shares will simply be bought by somebody else. In this way, a company can last for many generations.
Limited Companies - Disadvantages
1 limited company is more difficult to set up than a sole trader or partnership. It usually involves employing an accountant or solicitor to help with the following:
2 It has to be registered with a Government Office
3 It has to have a memorandum of association and articles of association.
4 The company’s accounts have to be sent to a Government Office each year, where anyone can inspect them.
5 This involves a loss of privacy compared to a sole trader or a partnership. Larger companies have to have their accounts audited by a specially trained accountant, who looks for errors and inconsistencies – this is a further expense.
Private limited company (Ltd)
A private limited company is a small to
medium-sized business that is owned by
shareholders who are often members of the
same family. This company cannot sell shares
to the general public.
Public limited company (Plc)
A public limited company is a limited
company, often a large business, with the
legal right to sell shares to the general public –
share prices are quoted on the national stock
exchange.
Franchise
A franchise is the right to sell another firm’s product, and use the name, logo and trading system of an existing business.
A franchisor (or franchiser) is a firm which sells others the right to trade under its brand name and to sell its products.
A franchisee is a person or business who pays for the franchise. They
buy the right to trade under another firm’s name.
Franchise - Advantages
1 The benefits to the franchisee is that they get to run
their own business selling products which are
known to be successful
2 There is less of a business risk than setting
up a completely new business, because the
products have already established themselves in
the market place.
3 The franchiser receives regular royalty payments
from all the franchisees, usually at around 10% of
sales.
4 The franchisee gets support from the franchiser in
setting up and maintaining the business. It is in both
their interests that the business succeeds.
5 Banks are more likely to lend money to a
franchisee, because they are aware of the success
of the products.
Franchise - Disadvantages
1 The franchiser risks losing their reputation if one
of its franchisees delivers a poor quality product.
2 A business can only sell the products of the
franchise, so the franchisee has limited freedom
to expand or introduce new ideas.
3 The franchiser can have little control over how
the franchisee sells their products or services,
other than the legal contract signed at the start
of the franchise.
4 The franchisee has to make continued royalty
payments throughout the life of the business.
The royalty payments are a percentage of
turnover, not profit – this means that even if the
business makes a loss, they still have to pay
royalties.
Co-operative
A co-operative (or co-operative society) is a type of business owned by the members collectively. The members invest together, run the business together and make decisions in a democratic way.
Co-operatives are run according to a set of values and principles:
1 Shares can only be bought from and sold to the co-operative. A person who buys shares becomes a member.
2 No matter how many shares a member has, they only get a single vote at society meetings.
3 Profits are passed on to the members fairly.
