Forms Of Business Organisation

Question 1

Sole trader : definition

Answer 1

A business that is fully owned by one person who has complete control over how the firm is run.

Question 2

Advantages of operating as a sole trader :

Answer 2

Low startup costs (few legal formalities), all profits retained, better control (no need to consult others), financial privacy (don’t have to publish financial records), increased flexibility, offer more personal services to customers.

Question 3

Disadvantages of operating as a sole trader :

Answer 3

Unlimited liability, difficulty raising capital (banks often reluctant), long hours and lack of continuity( disruptions can happen at any point) , lack of expertise, lack of competitiveness (unable to exploit economies of scale).

Question 4

Partnership : definition

Answer 4

When two or more people combine to form a business.

Question 5

General partnership (partnership act 1890)

Answer 5

Most common form of partnership, between 2 and 20 partners, partners not involved in day to day running are called sleeping partners, each partner has unlimited liability.

Question 6

Limited partnership (limited partnership act 1907)

Answer 6

When one or more partners want to invest without taking part in management and without risk of unlimited liability, they have limited liability and can only lose the money they’ve invested, at lease one partner must have unlimited liability and at least one must have limited.

Question 7

Sleeping partner : definition

Answer 7

They choose not to become involved in the running of the business. Have limited liability.

Question 8

Limited partner :

Answer 8

Must not take part in running of business, limited liability.

Question 9

Limited liability partnership (LLP) act 2000

Answer 9

All LLP have limited liability, all cans take part in running, a LLP is a corporate body (it has its own legal existance), don’t pay tax (all profit goes to partners who pay income tax) , rare form of business, popular among financial institutions.

Question 10

Setting up a partnership :

Answer 10

No specific legal requirement, provide evidence of what has been agreed and so avoid / resolve disputes , legally drafted partnership deed agreement is recommended.

Question 11

Patnership deed : contents

Answer 11

Trading name and function of business, amount of capital each partner will invest, profit ratio, seniority and control over business, the rules on admitting new partners, rules on ending partnership.

Question 12

Advantages of partnership :

Answer 12

Low startup cost, shared workload, partners can specialise in particular roles, financial privacy, more efficient decision making.

Question 13

Disadvantages of partnership :

Answer 13

Loss of autonomy (all partners consulted for decision making), unlimited liability, lack of continuity (death or divorce of partner leads to partnership being dissolved), lack of capital (banks tend to charger higher interest).

Question 14

Unlimited liability : definition

Answer 14

If business doesn’t have money to cover its debts the owner will have to use their own money to ensure the debts are paid,

Question 15

Private limited company : brief breakdown

Answer 15

Required by law to carry the suffix ‘limited or ‘LTD’ as part of their company name, and ltd is a separate legal entity, limited liability, part owners know as shareholders, general public cannot buy shares, shareholder can only sell shares of other shareholders consent.

Question 16

Advantages of operating as LTD :

Answer 16

It can raise more capital (less risky to banks, easier loan), limited liability, Ltd won’t be affected by death or divorce of single shareholder (continuity), specialisation, control (fewer shareholders than PLC abe wise shares aren’t sold publicly.

Question 17

Disadvantages of operating as a LTD :

Answer 17

Lack of privacy (publish accounts), setup costs (time consuming and costly legal process), taxation , limit on capital (cannot sell shares to public).

Question 18

Public limited company : brief breakdown

Answer 18

Incorporated business (separate legal entity from owners), shareholders have limited liability, required to carry suffix PLC or plc, offer shares for sale to general public on the stock exchange.

Question 19

Advantages of operating as a PLC :

Answer 19

Raising capital (less risky and easier to borrow money), limited liability, continuity (won’t be affected if one shareholder decides to sell shares).

Question 20

Disadvantages of operating as a PLC :

Answer 20

Setup costs (must have a share capital of at least £50,000 and other restrictions apply to PLCs and not LTDs), less privacy (publish accounts and market must be informed of details which impact company’s share price ie give competitors insights), divorce between ownership and control (shareholders are owners but directors and managers control the day to day running ie difficulties if there’s a conflict of interests), threat of takeover (the value of PLC depends on its share price ie it falls too low may become a takeover target).

Question 21

Franchise : definition

Answer 21

A franchise is an agreement between two parties, which give one party (the franchisee) the rights to market a product or service using the trademark of another business (the franchisor). franchisee usually agrees to pay franchisor fees and loyalties

Question 22

Franchisor : definition

Answer 22

The legal entity that grants a licence to the franchisee, which allows them to trade under the franchisors name in return for annual fees. (Depending on the business involved, the franchisor may provide training, management expertise and national marketing campaigns. May also supply raw materials and equipment.)

Question 23

Advantages of being a franchisor :

Answer 23

G-rowth (expand more quickly, may grow nationally and internationally)
A-dministration (each franchisee is liable for their own business)
P-rofit (profit automatically increase due to upfront licence fees and annual royalties, at little cost to franchisor)

Question 24

Disadvantages of operating as a franchisor :

Answer 24

Control (ultimately franchises manages day to day running, if franchisee behaves in an unethical manner this can affect brand name lead to decrease in profit) Diseconomies of scale ( if attempt to issue too many licences and grow too quickly may experience this)

Question 25

Franchisee: definition

Answer 25

The franchisee is the legal entity that acquires the licence to trade from the franchisor and pays annual fees for that licence. (Legal structure can be sole trader, partnership or limited company.

Question 26

Advantages of setting up as a franchisee :

Answer 26

Defined territory (guarantee that no other franchises under the brand will compete within a certain geographical area)
Access to finance (banks consider lower risk, willing to loan for investment and growth purposes.
Well known brand (buying into already established profitable format, attracts increased sales revenue and larger profit)
Training and support (receive assistance in form of product development, advertising, promotion and training and support for management and employees)

Question 27

Disadvantages of setting up as a franchisee :

Answer 27

Fees to franchiser (upfront fee which can be substantial, annual loyalties, must purchase raw materials from franchisor).
Loss of control (franchisor has major say and receive strict guidelines on how business is operates, cannot deviate from these).
Interdependency (negative actions of other franchisees operating under same brand can affect profits).

Question 28

Business format franchising : brief breakdown

Answer 28

Most common form, usually assist with ; site selection, interior layout and design, hiring and training staff, advertising and marketing and product supply, undertakes R&D and provide marketing support for entire franchise, franchisee pays upfront fee and ongoing royalties.

Question 29

Product and trade-name franchising :

Answer 29

The franchisor provides trademarks and logos, national advertising campaigns but not a complete business system, franchisee pays franchisor upfront fees but not obliged to pay additional royalties.

Question 30

The public sector : brief summary

Answer 30

Includes organisations that provide basic public services such as armed forces, policing, roads, educations, and health. These services are provided through income from taxation and in th uk, national insurance.

Question 31

The private sector : brief summary

Answer 31

Includes organisations and individuals that provide goods and services and their primary aim is to make a profit; for example shops, manufacturers, financial services etc. Profits are distributed to owners and shareholders as well as reinvested.

Question 32

The voluntary sector : brief summary

Answer 32

Different from two other sectors because it’s not for profits and isn’t government controlled. Traditionally it has occupied a third space and sits between the public and private sectors. the third space is one where needs have not been met because the private sector has not seen it profitable to do so and the public sector has either neglected these needed or not been able to afford to address them.

Question 33

Social enterprise : definition

Answer 33

Business with primarily social objectives whose surpluses are principally reinvested for the purpose in the business of community, rather than being driven by the need to maximise profit for shareholders and owners.

Question 34

Advantages of setting up a social enterprise :

Answer 34

Profits for change ( reinvest profits or donate them to social organisations to generate a positive social change ).
Donations for change (donations support communities to tackle social problems and help improve people’s life chances).
Revenues for change (provide money to fund training, employment, help environment).

Question 35

Disadvantages of setting up a social enterprise :

Answer 35

Dependency on funds (funds available depends on amount raises).
Greater risk (if financial losses no funds available).

Question 36

Charity definition

Answer 36

A charity must have a charitable aim, ie relief of poverty, homelessness or drug addiction. It’s sole purpose must be charitable. It doesn’t provide private benefit for anyone, benefits must be for general public.

Question 36

Advantages of trading as a charity :

Answer 36

Charity work (sole aim is to make profit and reinvest into retail networks or to use funds to finance charity work).
Wider range of products (in selling of second hand goods through retail).
More affordable (products are cheaper than high street retailers).

Question 36

Drawbacks to trading as a charity :

Answer 36

Dependency on funds (amount available depends on amount raised.)
Greater risk (some consumer perceive quality of second hand goods to be inferior)
Lack of privacy (annual submissions made to Charities Commission as well as financial statements.)

Question 37

Similarities between charities and social enterprises :

Answer 37

Both exist to fulfil a social mission

Both reinvest the majority of their profits in doing social goods.

Question 38

Differences between charities and social enterprises :

Answer 38

Charities traditionally aim to fund their social mission through grants and donations.
Social enterprises aim to fund their social mission through trading activities - selling products and services to customers.