Forms of business Flashcards
What is a business form?
the legal structure that a business takes. It could be a sole trader, a partnership, a private limited company (ltd) or a public limited company (plc).
What is limited liability?
Limited liability protects a business owner’s personal funds from being used to pay business debts.
Explain how a business might grow.
Sole trader -> partnership
Sole trader -> limited company -> public limited company
Explain what a sole trader is.
Business owned by one owner, but they can take on staff
Can employ people but they will not be involved in control of business
Tend to be small businesses eg small shop
Has unlimited liability
What are the advantages of being a sole trader?
Easy to set up
Make decisions quickly
Less capital needed
Taxed differently – National Insurance contributions are lower
All profits kept by the owner
Can offer personal attention to customers
Don’t have to make any information about the company public
They are their own boss
What are the disadvantages of being a soletrader?
Unlimited liability
Difficult to raise money – seen as a risk
Don’t have economies of scale
No one to take over for ill-health or holidays
Explain what a partnership business is.
Two or more people –the partners - share the risks, costs and responsibilities of being in business.
The profits and gains of the partnership are shared among the partners, unless the partnership agreement states otherwise.
Each partner is personally responsible for paying tax on their share of the profits and gains, and for their National Insurance contributions.
What are the advantages of being a partnership?
Easy to set up
Capital needed is small
Easier to raise extra capital, as partners all have family they could ask
Profits go to partners, which is very motivating
Smaller business means good working relationships
No need to make public any information
Partners contribute with range of skills
Share problems and decisions
What are the disadvantages of being a partnership?
Unlimited liability
Partners may have disagreements about; Control of business Sharing of profits Withdrawal from the partnership Inviting new partners into the business
What is a private limited company?
Sole traders may grow and expand and want to become a ltd company
Friends and family can buy shares in the business, this will make them part owners.
Shares cannot be bought by the public
Owners control who buys the shares
Expand by selling more shares, giving the business more capital
Normally medium sized businesses
Have the benefit of limited liability, those that own or buy shares in the business can only lose their original investment, their private assets remain safe.
What are the advantages of being a private limited company?
Limited liability
Can raise extra capital by selling more shares, to friends and family, making it easier to expand
Easier to employ managers more quickly to run business if the owners don’t want to do it themselves
Has its own legal status – separate from the shareholders
What are the disadvantages of being a private limited company?
Accounts of the company cannot be kept private
- Audited each year
- Copy sent to Registrar of Companies
- Available for public to see
More difficult and expensive to set up - more administration
Cannot sell shares on stock exchange, which limits the amount of capital that it can raise
What is a franchise?
Where a small business owner buys the rights to sell the goods and services of a large, well-established company.
Franchisee; This is the business owner who is buying the rights.
Franchisor; this is the business who are selling the rights e.g. Subway
What are the advantages of franchising?
The franchisor chooses the franchisees carefully – knows what characteristic that make a successful franchisee
The franchisor decides how much money the franchisee must invest in the business
The franchisor provides support – management advice & training – help franchisee solve problems.
The franchisee benefits from the brand name of the franchisor - already have a customer base, spend less on marketing, less risk
What are the disadvantages of franchising?
Franchisee’s do not have freedom of running their own business;
Bound by rules e.g. Can’t vary product or price
Franchisee pays percentage of profits in royalties
Franchisee will never own the business outright
Franchisor has to let go of a bit of control over the franchised outlet
What is a social enterprise?
A business that trades for a social / environmental purpose.
At the core of a social enterprise is the objective to help society or the planet in some way, they are not charities
What is a life-style business?
The aim of a lifestyle business is to provide great quality of life for the owner.
Owners start a business hoping to sustain a certain level of income.
They may start a business doing something they really enjoy.
It allows an entrepreneur to live how they want and still run a business
Explain online businesses.
Available to the customer 24/7
Can be managed from anywhere, owner does not need to be sat in an office.
Easy to set up.
Explain growing to be a public limited company.
Once a limited company has grown in size and needs further investment which it cannot get from its current pool of owners it may consider becoming a PLC.
If it plans on floating on the stock market, it will need to first issue a prospectus where potential investors are invited to purchase share before flotation (called an IPO).
Going public is expensive Lawyers to draw up legal paperwork Publications need to be written Advertising and administration Company must have £50,000 in share capital
