Forms Of Business Ownership Flashcards
Definition of sole trader
A business organisation that has a single owner causing no legal distinction between the owner and the business. They receive all profits except taxation specific to the business and has unlimited liability meaning they are held personally responsible for the debts of the business
Definition of partnership
A business relationship of two or more entities conducting business for mutual benefit. They manage the business and are equally liable for its debts; other individuals in the business are limited partners who may invest but arent directly involved in the management and are liable only to the extent of their investments. In a partnership each partner shares equal responsibility for the company’s profits and losses as well as its debts and liabilities.
What is a deed of partnership
A binding legal document which states the formal rights of partners in the business
What is a silent/sleeping partner
A partner that contributes capital and shares in profits/losses but doesnt participate in decision making
Definition of limited partnership
A partnership which has at least one ordinary partner who has unlimited liability and a limited parented that contributes capital, shares in profit but has limited liability. A limited partner can’t participate in decision making
Definition of a limited company
A business organisation which has a separate legal entity from those of its owners. The liability of the members or subscribers of the company is limited to what they have invested or guaranteed in the company.
Definition of shareholders
Investors who have bought a share into the company
Definition of limited liability
Each shareholder is only liable for the original amount of money invested in the business
Definition of a franchise
An agreement between two parties which gives one party (the franchisee) the rights to market a product or service using the trademark of another business (the franchiser)
Definition of a social enterprise
A business venture established to address a social issue within a cormmunitity or to improve the quality of life for citizens or the environment. All profit made is reinvested to help achieve the social objective of the business.
Definition of a stakeholder group
A specific group of people who have a genuine interest in the activities of a particular business and who will be effected by the activities of the business.
What is a private sector organisation
These are organisations owned, financed and run by private individuals. These organisation can run from sole traders to multinational businesses although they aim to make a profit they’re can be non-profit organisations such as charities and mutual societies for example Tesco is private.
what are public sector organisations.
These can also be known as state-owned organisations that are owned and operated by the government and mainly provide essential services such as education, healthcare and policing for example, the NHS and the PSNI. Their main aim is to provide public services that would be difficult for individuals to provide themselves or can’t afford they rely on finance from taxation.
What are unincorporated businesses
This is where there is no distinction in law between the individual owner and the business causing their identity to be the same for example, sole traders and partnerships.
Tescos would be a incorporated business whereas Robinson would be an unincorporated business
What are incorporated businesses
This is where legal identity is seepage from the individual owners and as a result can own their own assets and owe money and enter into contracts on their own right. For example private limited companies and public limited companies.
Both incorporated and unincorporated businesses are within the private sector. At the start of 2013 there was 4.9 million private sector businesses in the Uk.
Overview of a sole trader
They usually have very little capital for expansion and heavily reliant on the owners personally commitment to make the business success due to unlimited liability. These businesses tend to be hairdressers or newsagents.
What are the advantages of being a sole trader
Low start up costs- they usually start off relatively inexpensive and with few legal processes allowing them to start the business selling immediately. They have little bureaucracy and rarely have to report back to the government as them and the business are seen as the same entity allowing them to set up quickly which is beneficial for seasonal businesses
Profits- All profit earned by the sole trader are wholly owned by the sole trader as there is no other entity to share the business with also allowing them to have full control over business decisions.
Finances are private- As by law they dont have to pay corporation tax and only income tax meaning they have to earn a certain amount of profit before they start paying allowing them to make profit quicker as well as not having to legally publish their financial statements.
Flexibility- they face the least government regulations and are better equipped to adapt to shifts in the economic conditions.
What are the disadvantages of being a sole trader
Unlimited liability- They have unlimited liability meaning they are solely responsible for businesses debts. If they become bankrupt the individual is responsible for this. No divorce between person and organisation.
Raising capital- most sole traders have difficulty raising capital as there is fewer people to invest into the business as banks are reluctant to lend money to individuals who have no credit rating and a high probability of insolvency causing this to limit their market share and growth.
Work long hours- as they are solely responsible they often have to work long hours to ensure the business is successful to due unlimited liability. If they are sick they have no one to look after the business
Lack of expertise- sole traders often have a few basic skills but for a business to run they need a range of skills which is better obtained through multiple partners which can lead to failure.
Competition- they often charge higher prices to make profit but they are often unable to take advantages of discounted materials or economies of scale as they have little capital to start.
Overview of partnerships.
This is where two or more partners share ownership and decision making. Examples of partnerships may include law or accountancy firms.
They sign a partnership agreement or partnership deed to provide written evidence of their terms that usually include the capital each person must invest, salaries and percentage share of profits among partners. If this agreement doesn’t exist then the partnership act 1890 applies stating that all profits and losses are divided equally.
What are the three main partnership types
- Ordinary partnership- where each partner has unlimited liability and an agreement setting out responsibilities and profit. This allows more capital to be used in a businesses compared to a sole trader
- A limited partnership- where atleast one partner has unlimited liability allowing atleast another partner to contribute finances receiving a dividend with limited liability but has no involvement in the running of the business (a sleeping partner)
- a limited liability partnership (LLP)- These are designed for trading partnerships allowing each person who are actively involved in the business to limit their liability with atleast two partners having additional legal responsibilities and must register with companies house.
What are the advantages of a partnership
Low start up costs- they are often inexpensive and simple to start up allowing them to have faster entry to market as they can launch their business quicker allowing them to be more agile in responding to market opportunities. These lower costs may attract more partners who have better skills.
Profits- they are divided equally among the number of partners in a business unless stated otherwise. There is less need to repay loans or investors as the partners invest into the company itself making it easier to profit-share
Expertise- as there is more people making decisions there is a wider range of skills allowing certain partners to specialise in certain aspects of the business
Shared Workload- compared to sole traders they can share equally the work and can cover for absent partners meaning their workload isn’t disturbed allowing them to continue if a person is sick.
Raising capital- they often can easier get loans from banks compared to sole traders but the partners are also able to invest more as there are people people to contribute allowing them to focus on creating value for the business attracting more customers as they arent distracted repaying larger loans.
Finances are private- they arent legally required to publish financial statements for external scrutiny
Effective decision making- each partner can contribute to problem solving allowing them to focus better on business and making a profit than decisions that may take a while
What are the disadvantages of a partnership
Unlimited liability- they are personally responsible for debts which can discourage potential partners from taking risks in a business and can complicate the business is a person leaves or dies causing them responsible for their share of the debts and liabilities as well as being complex for partners to organise.
Loss of autonomy- they must consult each other on decisions since they each take part in the business and can take time due to a risk of a deadlock and can relate to dependency on others and partner conflict.
Lack of capital- they can also find it difficult to raise loans from banks compared to public limited companies
Lack of continuity- they often resolve over trust or personal issues such as a lack of control
What is a limited company
This is a business that operates as a separate legal entity from its owners (shareholders). It is managed by directors who may also be shareholders but don’t have to be. It is formed through submission of 2 documents to the Register of companies at the companies house.
What is the companies house
This is an organisation responsible for forming, monitoring and winding up limited companies in the Uk. All limited companies must submit annual financial statements and reports to this house.
What are the two documents needed to form a limited company
- the memorandum of association document
- The articles of association.
What does the the memorandum of association document outline
It outlines the official name of a new company.
A company form (private or public)
It’s objectives for the company
Amount of share capital
Details of shareholders.
What does the articles of association document outline
It sets out how the company is run, governed and owned by its shareholders
Directors powers, responsibilities, decision making
Appointments and removals
Indemnity and insurance
Shares, its distribution and dividends
Capitalisation of profits
Details of shareholders
General meeting
Voting rights.
Do limited companies have limited or unlimited liability
Shareholders have limited liability meaning they only are responsible for debts for the company with their personal assets not being at risk. Only up to the value of the shares they purchase that they have liability for.
What is ltd short for
Private limited company
What is plc short for
Public limited company
What is a private limited company (Ltd)
A small to medium sized business that is usually run by the family or small groups of individuals who owns it. They aren’t listed on the stock exchange meaning they can’t sell their shares to the general public
What is the stock exchange
This is a trading floor where members of the exchange can buy and sell shares through mainly online computing
What are the advantages of being a private limited company
Raising capital- there is no limit to the number of shareholders (however theres a limit to the number of shares available) and the company can raise finance through these shares. They can keep their affairs private and can therefore determine its own objectives without the pressure to achieve short term profit
Limited liability- shareholders aren’t personally responsible for the businesses debts therefore, it may be more appealing to become a shareholder allowing more shareholders to raise capital
Continuity- if there is a death of a shareholder the continuity and existence of the company will be mostly not effected as their share can be reissued to other shareholders which is an advantage compared to partnerships.
Specialisation- compared to sole traders or partnerships there is a greater number of directors who will have a higher range of skills or specialisation resulting in less training
Control- as they can’t sell shares on the stock market due to needed agreement from all shareholders, shareholders are kept to a minimum allowing them to have more control and be protected from hostile takeovers as it cannot be sold without their consent.
What are the disadvantages of a private limited company (Ltd)
Lack of privacy- they are required to submit their financial statements to the registrar of companies which can be inspected by the general public and competitors. They also must have LTD after it’s name to warn people it’s shareholders have limited liability
Setup costs- it can be time consuming and costly due to solicitor fees in order to deal with official legal procedures opposite to sole traders.
Taxation- they have to pay corporation tax and therefore, can make less profit from the start compared to smaller companies which isn’t beneficial if it is a seasonal business. Directors pay income tax, national insurance and pension costs on salaries and dividends
Restrictions on raising capital- they cannot sell their shares on the stock exchange due to needing consent from all shareholders causing it to be harder to raise capital. Banks also see their limited status as a risk and can refuse to offer loans or request personal guarantees such as cars or house.
What are examples of private limited companies
Alliance boots with 45% of their shares being owned by walgreens. It is one of the largest companies in Ltds
What are public limited companies
This is a business with limited liability with a share capital of over £50000 that contains Atleats two shareholders, two directions and a qualified company secretary. They are allowed to sell shares on the stock market but have to have their information public.
What are the advantages of a public limited company
Raising capital- if they need more finance they can issue shares on the market to the general public and are able for o gain access to these funds interest fees with lenders also concluding this company is less risky due to their size
Limited liability- they are a separate legal entity to the business with their personal assets being protected however, due to the size of the company they are not seen as high risk allowing this to be an advantage.
Continuity- since these businesses tend to be large with directors and shareholders a death of a shareholder is unlikely to affect the businesses activity.
Specialisation- they are a large company allowing for their to be skilled employees giving them an competitive advantage due to this specialisation in the market place.
What are the disadvantages of a public limited company
Setup costs- set up is more complicated due to legal fees, time and appointing directors.
Privacy- they must submit annual financial accounts to the companies house which anyone can access as-well as competitors allowing scrutiny by the financial press as well as putting of some shareholders resulting in the business to focus on short term profits to maintain share price which can distract from long term decision making
Ownership and control- the businesses decisions are made by directors but are still held accountable by shareholders as directors may not act in shareholders best interest resulting in conflict.
Threat of a takeover- the value of the company is determined by the share price which can be easily accessed causing a threat of a takeover of the company is underperforming
Example of public limited company
There’s has been a fall of these businesses from 2000 companies to just over a 1000 in 2014 with business such as selfridges and pizza express turning private due to financial failure and public status.
Definition of dividend
This is a payment made by a company to its shareholders out of the profit it’s earned. High growth companies rarely offer dividends because all their profits are reinvested to help sustain growth. They are allocated as fixed amounts per share with shareholders recovering a dividend in proportion to their shareholding.
What are the advantages for operating as a franchisee
Well known brand- this allows them to secure in the knowledge that they’re buying into an already established company that is profitable which attracted increased sales and larger profit. It’s tried and tested
Defined territory- it is guaranteed that other franchisees within the same brand will set up a business in your geographical area meaning your business has little competition from the same brand around them
Training- they are required to received training and special advice from the franchiser on an ongoing basis meaning the franchisee doesn’t have to pay for training.
Marketing- the franchisee doesn’t pay for marketing as the franchiser carries out market research and developing products meaning they can focus on making a profit for that chain.
Access to finance- it may be easier to give a well known franchise a loan as they are seen as lower risk for invested and growth purposes.
What are the disadvantages of being a franchisee
Fees to franchiser- they have to continually pay royalties to the the franchiser aswell as an initial upfront fee for the use of the brand.
Market- they can’t benefit from the market as supplies must be bought from the franchiser which may charge a higher price than similar products on the market that can lower their profit margins.
Control- they are given strict guidance over how the business is ran as they have less control over what is selling, how it’s sold and what is sold aswell as advertising and the businesses looks and features.
Interdependency- negative actions from other franchisees can impact their business and profits over all franchisees.
A business also can’t be sold without the franchisors permission and is only for a fixed period of time and not automatically renewed.
Advantages for the franchiser
growth opportunities- they don’t have to spend large amounts of money in order to expand more organically allowing it to grow nationally and internationally with the possibility of increasing economies of scale.
Profits- due to more locations their profit increases with up front license fees aswell as annual royalties.
Control- applicants are carefully selected allowing them to generate a continuous stream of revenue while also still having control over what is being sold and how it’s being sold.
Disadvantages of being a franchiser
Control- however as they are trusting someone else to sell products they cannot manage day to day running and could risk a franchisee creating a bad reputation for the entire brand causing decreased profit.
Costs- they must support the franchisee to ensure they are following procedures correctly and therefore must train and offer advice to each franchisee while also conducting market research which can be costly and time consuming as if a franchisee grows the support network grows.
Conflict- there can be disagreements if a product fails to sell they may blame each other for inadequate training or market research
What does economies of scale refer to
This is the idea that a business can achieve cost advantages as it increases its level of production or output. If a company grows and produces more goods or services, its average cost per unit of production decreases
What are the advantages of a social enterprise
Profits for change allowing them to reinvest money into the company to benefit positive social change.
Donations for change they can receive donations to tackle social problems and improve people’s life chances
Revenues for change that can provide training employment and help the environment
What are the disadvantages of a social enterprise
Dependency on funds as they usually reinvest into the business if there’s no funds they can fail
Greater risk as they have a financial loss from trading that can’t reach their desired goals of better people’s lives and environment
