Section 1.4 Types of Businesses Organisations Flashcards
What are the different types of business organisations (ownerships) in the private sector?
- Sole trader
- Partnership
- Limited Companies (Private and Public)
- Franchise
- Joint venture
What is a sole trader?
A business that is owned and controlled by just one person who takes all of the risks and receives all of the profit
What are the advantages of a sole trader?
- Easy to set up
- Makes all the decisions
- Complete control
- Keeps all the profit
What are the disadvantages of a sole trader?
- Unlimited liability (responsibility)
- Difficult to raise funds to expand the business
- Difficult to compete with larger firms
- Owners may lack some essential business skills
- Have to work very long hours to make a living
- If sole trader dies or retires, business no longer exists
What is a partnership?
A business formed by two or more people who will usually share responsibility for the day-to-day running of the business. Partners usually invest capital in the business and will share profits
What are the advantages of partnership?
- Greater access to finance (more than one person investing in the business)
- Decision-making is easy as it is shared and will also lead to better decisions
- Reduces workload
- Easy to set up (Deed of Partnership)
What are the disadvantages of partnership?
- Unlimited liability (Responsibility)
- Partners must share profits
- If one partner leaves the business ceases to exist
- Business decisions are binding on all partners (even if they didn’t agree to it)
- Difficult to raise additional finance to expand
What is an unincorporated business?
A business that does not have legal identity separate from its owners. The owners have unlimited liability for business debt
What does unlimited liability mea?
If an unincorporated business fails, then the owners might have to use their personal wealth to finance any business debts.
What is What is the difference between unincorporated companies and limited companies?
Unincorporated companies (sole trader, partnerships) has unlimited liability where limited companies do not as limited companies are owned by its shareholders
What are the two types of limited companies?
Private limited company
Public limited company
What is a private limited company?
Often a small to medium-sized company; owned by few shareholders who have limited liability. The company cannot sell its shares to the general public
What is a public limited company?
Often a large company; owned by many shareholders who have limited liability. The company can sell its shares to the general public
What do private and public limited companies have in common?
- Legal documents
- Shareholders invest their capital by purchasing shares in the company
- Ordinary shareholders are the owners of the company
- Shareholders have limited liability
- Business continues even if one or more shareholders die
- Can raise finance by selling shares
- Profit belongs to ordinary shareholders
- Profit is shared through the payment of dividends
- Shareholders make decisions
- End of year financial statements must be produced and submitted to the correct authorities
What is a dividend?
A payment, out of profits, to shareholders as a reward for their investments
What are the disadvantages of private limited companies?
- Companies are usually small
- Often difficult to sell shares
- Only a few shareholders
- Even if successful business, it may be difficult to raise additional capital
- Often difficult to raise finance
What are the disadvantages of public limited companies?
- Legal formalities are expensive
- Decision making may be influenced by major investors for their own objectives
- The company is always at risk of takeover by another company
- Legal requirement are much stricter
What is a franchise?
A business system where entrepreneurs buy the right to use the name, logo and product of an existing business
What is a franchisor?
Is the person or company who gives the license/ right to sell its products, in return for royal payments
What is a franchisee?
Is the person who is granted the license by the franchisor to sell its products
What are the advantages of a franchisor?
- The more successful the franchise the more royalty payments the franchisor receives
- Can expand without the need for large amount of capital
- Franchisee will be motivated, therefore there is a high chance of the business succeeding
What are the disadvantages of a franchisor?
- If franchisee does not maintain standards, the company’s reputation can be damaged
What are the advantages of a franchisee?
- Less chance of business failure
- Franchisee can decide the legal structure of the business
- Franchisor provides advice and training
- Easier to obtain loans from a bank
- Product is already advertised nationally or internationally
- Franchisor will check the quality of suppliers, so Franchisees are guaranteed to have quality supplies
What are the disadvantages of a franchisee?
- Initial cost of buying into a franchise is very high
- Franchisor will take a percentage of the profit (royalty payment)
- Franchisees have to follow very strict regulations
- Franchises will still have to pay for local promotions they decide to do
- Franchise is not automatically renewed
What is a joint venture?
When two or more businesses agree to work together on a project and set up a seperate business for this purpose
What are the advantages of joint venture?
- Gaining new insights and expertise
- Better resources from the other business
- It is only temporary
- Both parties share the risks and costs
- There are ways to exit the joint venture
- Low chance of business failure
- Can create long-lasting business relationships
- Less risk of discrimination
What are the disadvantages of joint venture?
- Vague objectives
- Flexibility can be restricted
- It is unlikely that companies working together share the same involvement and responsibilities
- Imbalance of expertise, assets and investments
- Any mistake can damage reputation all all firm of the joint venture
- Different culture or styles of leadership can make decision-making difficult
- Unreliable partners
When setting up a new business, what factors can affect type of business organisation they will choose?
- The number of owners - one owner (sole traders), two or more (partnership or incorporated)
- The owner’s role in the management of the business - Example: Some owners may only want to invest in a business and not want to run it (incorporated)
- The attitude towards financial risk - Example: If owners want less risk they will choose incorporated businesses
- How quickly the owners want to start operating their business - quicker time to set up (unincorporated), longer time to set up (incorporated)
- The potential size of the business - small businesses (unincorporated), larger businesses (incorporated)
What is a public corporation?
A business organisation that is owned and controlled by the state
What are the feature of a public corporation
- Owned and controlled by the state
- Financed mainly through taxations
- They tend to have social objective rather than profit objectives
- Prices of goods or services they provide are usually free or have very low prices
