Forms Of Business

Question 1

What’s a sole trader business

Answer 1

Run by an individual

Question 2

Main feature of a sole trader

Answer 2

They have unlimited liability, meaning they have full responsibility for all debts of the business

Meaning it’s risky, as they may have to sell personal assets, such as house

Question 3

What are the legal formalities of setting up as a sole trader

Answer 3

There are minimal, just has to start trading

Question 4

Advantages of a sole trader

Answer 4

• Freedom= Sole trader is there own boss, control over decisions
• Profit= Sole trader is entitled to all profit made
• Saving on fees= Aren’t any legal costs for drawing up an ownership agreement

Question 5

Disadvantages of a sole trader

Answer 5

• Risk= No one to share overall responsibility
• Time= Sole traders often have to work long hours
• Expertise= Sole trader may have limited skills
• Vulnerability= No one to cover if get ill
• Unlimited liability= Sole trader is responsible for all debts

Question 6

A sole trader enterprise may grow and expand and take on a different form of legal ownership.

What are the factors that affect what form of business a sole trader expands into

Answer 6

• Owner (what size business they want to run)
• Product (whether there’s enough demand for the business to become big)
• Nature and size of market (a very competitive market the business need lots of investors if they want large market share)
• How profitable the business is (need to generate more profit, to support more than a few owners)

Question 7

How many owners needed to set up a partnership

Answer 7

Two people (usually 2-20 people)

Question 8

Do partnerships have limited or unlimited liability

Answer 8

Unlimited liability, therefore the owners have shared responsibility for business’ debts

Question 9

Advantages of partnerships over sole traders

Answer 9

• Shared responsibility in decision making
• Share costs and risks
• More owners, extends variety of skills and ideas that can be used
• More owners means more capital could be put into the business, so can grow faster

Question 10

Disadvantages of partnerships rather than a sole trader

Answer 10

• Partners have to agree on big business decisions, which can lead to stress and conflict
• Profits will need to be shared between all owners

Question 11

What’s the two types of a limited company

Answer 11

Private limited company

Public limited company

Question 12

What’s the similarity and main difference of a private and public limited company

Answer 12

• Both limited companies are owned by shareholders
• However, main difference is who owns the shares.
• In a private limited company, the owners(shareholders) have to agree before anyone buys or sells shares (the sale of shares is done privately within the business)
• Public limited companies, anyone can buy shares. The shares are sold publicly on the stock market, meaning general public can buy shares. Most shareholders have little power in decision making unless you own a lot of shares

Question 13

What are dividends

Answer 13

• Dividends are a proportion of the profits earned by the company which are split and paid out to shareholders.
• Dividends are paid as a fixed amount per share. The more shares, the larger the dividend
• All shareholders (whether in a private or public limited company) are paid a dividend in return for their investment

Question 14

What’s a massive advantage for private and public limited companies

Answer 14

• They have limited liability. Meaning the business and owners have separate legal identities, so the money they invested is only at risk, not their personal assets

Question 15

Why do businesses go from sole traders or partnerships to private limited companies

3 advantages

Answer 15

• Becoming an Ltd company let’s the business sell shares, providing it with more money to grow
• Limited liability, therefore more financial protection, resulting in more financial risks taken
• More credibility than sole traders and partnerships, as they have their own identity, customers feel more confident buying from them

Question 16

Disadvantages of going from some traders or partnerships to private limited companies

Answer 16

• Ltd company requires lots of paperwork. They have to publish their accounts each year, unlike sole traders and partnerships
• Can be harder for a Ltd company to borrow money from banks, as owners aren’t risking personal assets. Meaning banks less able to get money back if company fails
• More owners, harder and slower to make decisions. Also, less profit available to each owner due to sharing
• Original owner has less control

Question 17

Why would a Private limited company may grow into a Public limited company

Advantages

Answer 17

• Ltd that has potential to grow may opt for stock market flotation and transition to a PLC
• Raise lots of capital by selling shares
• Lots of shareholders, meaning financial risk is shared
• Higher prestige for a business

Question 18

What’s stock market flotation

Answer 18

When a business publicly sells shares on stock market for first time

Question 19

Disadvantages of Private limited companies growing into Public limited companies

Answer 19

• More shareholders means sharing profits with more people, more pressure to generate higher profits
• Share prices on stock market influenced by national and global economy. Meaning owners have less control over share prices than Ltd do, could make business vulnerable
• If a person, or another business, buys more than 50% of shares they become very powerful, often have control and could take over firm

Question 20

4 types of legal ownership

Answer 20

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

Question 21

What the different types of business an entrepreneur might set up

Answer 21

• Franchises
• Online businesses
• Lifestyle businesses
• Social enterprises

Question 22

What’s a franchise

Answer 22

A franchise is an agreement which allows an entrepreneur to use the idea, name, model and reputation of an established business

• in return the entrepreneur usually has to pay established business an initial fee, plus ongoing royalty payments (usually percentage of revenue or profit)

Question 23

What’s a franchisor

Answer 23

A franchisor is the established business which is willing to sell or license its idea, name, model and reputation

Question 24

What’s a franchisee

Answer 24

A franchisee is the entrepreneur that buys into the franchise

Question 25

Advantages of franchising

Answer 25

• Allows the franchisor to grow quickly, as most of the costs and risks are taken on by franchisee
• Franchising can be an easy way for an entrepreneur to start up a business, as they’re using existing business model
• Often cheaper than starting from scratch, they may get support and advice from franchisor.
• Customers may already know brand

Question 26

What are online businesses

Answer 26

Businesses that trade through the internet

Question 27

Advantages of online businesses

Answer 27

• Relatively cheap and easy to set up as overheads and other fixed costs are low
• Can be run from anywhere, and don’t require regular working hours

Question 28

Disadvantages of online businesses

Answer 28

• Entrepreneurs may not have IT skills they need to set up and run the business
• Technical issues such as fraud, spam and viruses can cause lots of problems

Question 29

What’s a lifestyle business

Answer 29

Focuses on profit satisficing to obtain and maintain a desired lifestyle

Question 30

Why’s an entrepreneur motivated to create a lifestyle business

Answer 30

• Flexibility

- Achieving a good work-life balance

Question 31

One advantage and disadvantage of a lifestyle business

Answer 31

Advantage= - Low start up costs

Disadvantage= - Limited growth compared to traditional businesses, as investing money goes against goals of a lifestyle business

Question 32

What’s a social enterprise

Answer 32

A business that’s set up with a core aim to use its profits to benefit society

Question 33

What source of income can social enterprises get

Answer 33

Government grants