Lesson 3- Sole traders, partnerships, social enterprises and franchises

Question 1

Define the private sector

Answer 1

This sector consists of organizations that operate the sole purpose of profit. They are owned by private individuals and firms.

Question 2

Define a sole trader

Answer 2

This is the simplest form of business organization and as the name suggests, it is where an individual starts a business on his own with his personal savings or money borrowed from friends or family.

Question 3

What are the advantages of a sole trader? (5)

Answer 3

1. Easy to setup
2. Profit is not shared
3. Can have close relationships with their customers
4. Has the freedom to make his own decisions
5. Harder he works the more profit he makes

Question 4

Disadvantages of a sole trader (4)

Answer 4

1. No continuity (Lack of perpetual succession)
   2.Difficult raise a lot of capital
2. All the risk have to be taken alone as well as all decisions
3. Unlimited liability

Question 5

Define unlimited liability

Answer 5

This means that if the business makes a loss, the owner will loose his personal possessions if the assets in the business cannot add up to the total liabilities to be paid.

Question 6

Define partnership

Answer 6

This is where a group of people consisting of 2 to 20 invests money in a business with a common view to profit. The partners share the risks and rewards along with the responsibilities.

Question 7

Advantages of a partnership (5)

Answer 7

1. Easy to setup
2. Partners can specialize in their area of expertise
3. Work is shared
4. More capital can be raised
5. Financial information is not published.

Question 8

Disadvantages of a partnership

Answer 8

1.Unlimited liability
2.Conflicts among partners
3. Difficult to expand

Question 9

Define a limited partner

Answer 9

This is where a partner invests in a business but has limited liability. As a result of the business makes a loss, such a partner will only lose the money invested in the business and not loose his personal belongings

Question 10

Disadvantage of a limited partner

Answer 10

Lower share of profit

Question 11

What is a deed of partnership?

Answer 11

It is a legal document that states the partners rights in the event of a dispute.

Question 12

What does the deed of partnership contain? (5)

Answer 12

1. How much capital each partner will contribute
2. How profits/losses will be shared
3. The procedure to ending the partnership
   4.How much control each partner has
4. Procedure for taking on new partners

Question 13

Define franchising

Answer 13

This refers to a situation where the business sells the rights to sell the product or service to another business. The owner of the original business is known as the “franchisor” and the owner buying the business is called a “franchisee”. In order to buy the brand name of the franchisor, the franchisee must make a lump sum payment and then a monthly share of profits knows as royalty payments.

Question 14

Advantages to the franchisor (3)

Answer 14

1. Royalty payments, where large profits will be earned
2. Rapid expansion
3. Brand development

Question 15

Disadvantages to the franchisor (4)

Answer 15

1.The risk of loosing valuable trade secrets
2. Irresponsible management can damage the brand name
3. Profit shared with franchisee
4. Cost of support is high

Question 16

Advantages to the franchisee (4)

Answer 16

1. Doesn’t need to bring up a logo a brand
2. Free training
3. Chances of business failure is low
4. Less investment is required

Question 17

Disadvantages to the franchisee (3)

Answer 17

1. Cost to but the franchise is very expensive
2. Have to pay a percentage of the revenue to the franchisor
3. Less flexible because they have to follow the franchise model

Question 18

Define social enterprise

Answer 18

Consists of individuals who use their business skills to start an organization with the goal o improving human and environmental wellbeing. they are business with primarily social objectives whose surpluses are principally reinvested for the purpose in the business or community rather than being driven by the need to maximize profits for shareholders and owners.

Question 19

Characteristics of a social enterprise

Answer 19

1. Directly involved in producing goods or providing a service.
2. They have social aims and ethical values
3. They are self sustaining and do not rely on donations to survive
4. It is not a charity

Question 20

What are the three types of social enterprises and explain them?

Answer 20

1. Cooperatives- Owned and controlled by their members
2. Worker cooperatives- Workers are the owners
3. Charities- Rely on donations to operate