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.
What is a limited partnership?
A limited partnership has at least one general partner and one limited partner. All limited partners will have limited liability however the general memeber will have unlimited liability.
A limited partnership are often formed for projects that will last for a short period of time such as a building project.
What are the roles for general partners and limited partners?
General partners are usually responsible for day-to-day runnings of the business, Limited partners usually provide investment for the project in retrun for a share of the profits.
Name two limited companies?
Private limited company (Ltd)
Public limited company (PLC)
Name 3 requirements for a PLC?
Alotted more than 50k of capital
At least two memebers - shareholders, own the business
At least two directors - manage the business
Name 3 requirements of a LTD?
No minimum capital requirement
At least one member
At lease one director
What is the difference between how shares are traded between a PLC and a LTD?
Shares of a PLC can be traded on a stock exchange and can be bought and sold by individuals. Whereas shares from a LTD cannot be traded publicly but can be bought and sold privately.
Do limited companies have to submit annual accounts to the Companies House?
Yes - Directors role to do this on behalf of the shareholders
What are the advanatges of incorporation?
Liability for members and shareholders is limited to the amount they have invested in the business
Access to finance may be easier
Business will continue as a seperate legal entity
Enhancement of credability
Transfer of owenership is easier
WHat are the disadvantages of incorperation?
More complex requirements of setting up the business
Additional costs associated with record keeping and maintaining documents
Information filed with companies house means anyone can see them
Business finances must be kept entirely seperate from those of the owners compared to a sole trader who can just take drawings
Name two not-for-profit organisations?
Public Sector and Charities
What are public sector organisations?
Provide all public services in the UK, it is owned by central and local government and is funded by taxes.
What must a charity follow in order to be ran correctly?
They must follow chairty law and their purpose must be for public benefit. They are governed by a trust deed.
What financial statements will a chairty produce?
Statement of financial position
Statement of Profit or loss
Cashflow statement
Trustees Annual Report
Name 4 common features of business organisations?
Structure
Common objectives and team working
Co-operation
Responsibility, authority and division of work
What is structure?
Business made up of interrelated individuals, they will be grouped and organised in a way that they can work together effectivley.
Explain Common objectives and Team working as a common features of a business organisation?
Business will have defined objectives which will be met by individuals working together as a team and ensuring goal congruence (goals coincide with those of the organisation as a whole)
Name 4 different qualities that differentiate a service from a manufacturing business?
Intagibility - service isnt a physical product
Inseparability - Service cannot be seperated from its consumption by customer
Perishability - Any unused service cant be stored for future use
Variability - A service will be tailored to the needs of an individual customer
Name 4 ways a business can be funded?
Borrowing
New Capital
Retained Profit
Working Capital
Name 6 stakeholders in any business?
Customers
Suppliers
Finance providers
Owners
Employees
General Public
What are the different stakeholders attidue to risk?
Risk Adverse - Stakeholders will try and avoid risks at all costs
Risk seeking - Stakeholders wil actively seek out riskier options in order to increase their return
Neurtal - They are prepared to accept some risk but wouldn’t be a prime factor in making decisions
Risk appetite - Level of risk they are prepared to accept to achieve their objectives
Risk Tolerance - How much risk they are able to withstand
Risk threshold - The level up to which risk is acceptable ie: A certain amount of money
Are Shareholders of a private limited company (Ltd) more likely to have a higher risk appetite than trustees of a charity?
Yes
Explain co-operation as a common features of a business organisation?
To achieve the goals, individuals must develop good working relationships to work co-operatively.
Explain responsibility, authority and division of work as a common features of a business organisation?
Individuals will have assigned work and definied responsibilites which inturn divides the work between them. Depending on the structure of the business there will be varying levels of authroity.
How does a sole trader grow their business?
Introducing more of their own capital
Reinvesting profits
Borrowing using bank loans
What are the main features of borrowing money?
Expected to repay amount + interest
Longer term investment
What are the main features of new capital?
Capital is a long source of finance used to invest in growing the business.
May dilute the ownership if shares are being sold to introduce new capital
What are the main features of retained profit?
Usually used to reinvest into the business
Less expensive way of investing into the business
What is working capital?
Used to pay its pyables on time,
Short term method ie: to pay a VAT bill
Wont effect the day to day operations of the business
WHat is Risk Tolerance?
Level of risk which they can withstand
What is risk threshold?
The level up to which risk is acceptable eg: financial amount
What is risk apetite?
Level of risk they are prepared to accept
