Forms Of Business Ownership Flashcards
What is a sole trader?
A sole trader is when a sole person sets up a business. They can be found in all three sectors, but most commonly in the tertiary sector.
What are the advantages of being a sole trader?
Easy to set up. Keep all the profits. Make all decisions. Allows the freedom to be your own boss. Business accounts don't have to be public.
What are the disadvantages of being a sole trader?
Unlimited liability.
Lack of continuity - if the owner dies or is sick the business must close.
No one to help make decisions with.
The amount of capital available is limited.
A sole trader may need to work long hours and restrict holidays.
Opportunities for economies of scale are limited.
What is a partnership?
Instead of taking on the entire responsibility of running a business alone, an individual might share this with other people and so form a partnership. There may be between 2 and 20 people in a partnership, with no limit on some professions such as solicitors or accountants. They must sign the deed of partnership.
What is the deed of partnership?
This is an agreement between all the partners, which shows the ratios of which each partner receives profits or loss, how much they must contribute to the business financially and how much of a part they are involved in the day to day running of the business.
THIS IS NOT REQUIRED BY LAW.
What is the partnership act of 1890?
This says that if no partnership agreement has been drawn up, then the partners should receive an equal share of the profits (losses), each should participate in the management of the firm, and any decisions must be made on a majority basis.
What are the advantages of a partnership?
More start up capital and additional capital can be added during the year.
Ideas can be shared amongst employees.
Each partner can specialise in a certain business task.
They share any losses - much better than having the whole burden on their own.
What are the disadvantages of a partnership?
Unlimited liability.
Profits have to be shared out between 2 and 20 partners.
Decision making can be slower due to more people to consult with.
What are the advantages of a private limited company (ltd)?
Less risk than a sole trader. Shareholders have LIMITED LIABILITY.
Tend to be more investors, shareholders are willing to invest as they only lose the money they invested. Therefore there is more capital.
Banks are more willing to lend money.
Continuity of existence - the company will exist even if the owner dies.
The business only needs £2 in the business bank to start up an Ltd.
What are the disadvantages of a private limited company (ltd)?
Shares aren’t offered to the general public, only to family and friends.
Profits have to be distributed to all shareholders.
Financial affairs are not kept private.
It does cost the business time and money to set up as a company.
