Forms Of Business

Question 1

What does unincorporated/unlimited liability mean?

Answer 1

The owner is the business and they have unlimited liability

Question 2

What are the types of businesses with unlimited liability/unincorporated?

Answer 2

1. Sole traders

2. Partnerships

Question 3

What are sole traders?

Answer 3

1. An individual who owns and operates their own business

2. They own all the assets and are personally responsible for the business’ debts

Question 4

What is a partnership?

Answer 4

When two or more people start a business without forming a company

Question 5

What does incorporated/limited liability mean?

Answer 5

There is a legal difference between the owner and the business, the legal duty to pay debts run up by the company stays with it not the owner

Question 6

What are the benefits of operating as a sole trader?

Answer 6

1. Quick and easy to set up - the business can always be transferred to a limited company once launched
2. Simple to run - owner has complete control over decision making
3. Minimal paperwork
4. Easy to close/shut down

Question 7

What are the disadvantages of operating as a sole trader?

Answer 7

1. Full personal liability
2. Harder to raise finance - sole traders often have limited funds of their own and security against which to raise loans
3. The business is the owner
4. Can pay a higher tax rate than a company

Question 8

What are the benefits of operating in a partnership?

Answer 8

1. Relatively simple
2. Minimal paperwork
3. Business benefits from the expertise and efforts of more than one owner
4. Partners can provide specialist skills
5. Greater potential to raise finance

Question 9

What are the disadvantages of operating in a partnership?

Answer 9

1. Full personal liability
2. A poor decision by one partner damages the interests of the other partners
3. Harder to raise finance than a company
4. Complicated to sell or close

Question 10

Who are the owners of a company?

Answer 10

Shareholders

Question 11

What is a limited company?

Answer 11

1. Separate legal entity to the owners
2. Shareholders are not liable for the debts of the company
3. Owned by shareholders and run by directors appointed by the shareholders

Question 12

What are the advantages of operating as a limited company?

Answer 12

1. Limited liability - protects the shareholders
2. Easier to raise finance - sale of shares
3. Stable form of structure - business continues to exist even when shareholders change

Question 13

What are the disadvantages of operating as a limited company?

Answer 13

1. Greater admin cost
2. Public disclosure of company information
3. Directors’ legal duties

Question 14

What is franchising?

Answer 14

A joint venture between a franchiser and a franchisee, the franchiser is the original business and the franchisee buys the right to sell the franchisers goods in their business

Question 15

What are the benefits to the franchiser?

Answer 15

• A good growth strategy
• Quicker geographical growth
• Still has the options to open locations that are operated by the franchiser
• Capital investment by franchisee is an important source of financial growth

Question 16

What are the benefits to the franchisee?

Answer 16

• Given support by the franchiser, requires less expertise
• Is part of a well known organisation
• Less investment at the start up stage since the franchise business idea has already been developed
• Less risk, has a secure place in the market

Question 17

What are the drawbacks to the franchisee?

Answer 17

• Can be expensive to buy franchise
• Have to pay a percentage of their revenue to the franchiser
• Have to follow the franchise model, less flexible