Session 1 - Understanding Businesses Flashcards
What is incorporation?
Legal process used to form an entity or company. This separates the firm’s assets and income from its owners and investors.
Is a sole trader an incorporated business or unincorperated business?
Unincorperated business
Name 2 disadvantages of running an unincorporated business?
Owners retain full personal liability for the debts of the business
There is no seperation of ownership between the business and its owners.
What is an incorporated business?
A business created by filing legal documents and as such result in creation of a seperate legal entity such as a company. The business becomes liable for its own debts.
What is a sole trader business?
Inviduals who run their own business, generally small but can employ people. They have unlimited liability but are easy to set up.
Name 2 advantages and 2 disadvantages of a sole trader?
Advantages:
Cheap and easy to set up
Owner takes all the profit
Can run the business however they want
Disadvantages:
Sole traders have unlimited liability
Find it hard to raise capital
What financial statements will be produced by a sole trader?
Statement of financial position
Statement of profit or loss
Annual income tax
VAT return (if registered for VAT)
What is a partnership?
A group of people who come together to share the workload and responsibility of running a business. Between 2 and 20 people. No legal formalities to complete however a partnership may want to draw up a deed of partnership agreement.
Do partnerships have to draw up a deed of partnership and what do they include?
They will not have to have a partnership agreement and will be governed by the Partnership Act.
Deed of partnership includes:
Division of profits
Partners salaries/commission
Interest on capital and drawings
Name 2 advantages and 2 disadvanatges of a partnership?
Advantages:
Capital is easier to raise comapred to a sole trader as there are more partners
Like sole traders, partnerships will not have to publish any accounts.
Disadvantages:
Like sole traders, they will have unlimited liability
Profits will be shared among the partners
Do sole traders and partnerships need to make annual returns to Companies House?
No
What financial statements will a partnership make?
Statement of Profit or Loss
Statament of Financial Position
Each partner will need to make an annual income tax return
The partnership will need to complete VAT returns if VAT registered.
What is goodwill?
Intangible asset which may have been built up as a result of various factors including: loyal customer base, positive reputation and a strong workforce.
It is the difference between the value of a business as a whole and the business’ assets and liabilites.
What happens in terms of goodwill when a partner retires?
Goodwill will be valued and they will recieve their share, if there is not enough money to pay the partner their share then they may leave some capital in the bueinsess as a loan which is then paid back over years.
What happen in terms of goodwill when a new partner joins?
A new partner will be expected to buy in to the partnership and will be charged a premium for their share of the goodwill. This is due to the partner receiving the share or profits and will benefit from goodwill created by existing partners.
Are the debts of a partnership shared in the ratio of the profit share?
No - partners are liable for the whole business
What needs to happen when there is a change in partners in a partnership?
Result in the partnership agreement being changed and updated to reflect the new profit sharing ratio.
What does LLP stand for and what is it?
Limited liability Partnership (LLP) is often the preferred business format for professional partnerships. It is set up through process of legal incorporation which requires certain documents to be submitted to the Registar of Companies at Companies House.
What are the Partners called in an LLP, how many must be responsible for legal work in an LLP?
Partners are called members and must be at least two delegated members who are responsible for ensuring legal and accounting requirements are carried out.
Which financial statements are produced for LLP’s?
Statement of Profit or Loss
Statement of Financial Position
Auditors reports
Supporting notes to the financial statements.