Theme 1 - 1.5.4 - Forms Of Business Flashcards
What is a business form ?
A business form is the legal structure that the business takes ( in the UK ) - It could be a sole trader, a partnership, private limited company or a public limited company
What business form is the most common in the UK ? And why ?
Ltd - Private limited company - this is because they can sell shares to friends and family to raise money to expand and they get the benefit of limited liability
What is limited liability ?
Limited liability means that the owner of the business has no personal liability for business debts - the owner has a separate legal identity from the business and is NOT liable for the payment of the debts from their own personal funds
What is unlimited liability ?
If a business gains debts, or goes bust or is sued this could be a problem for the owner - if there is no money in the business then the owner would need to pay using their own savings, finances, they may even have to reportage their home or even sell their car to pay the debt - this is unlimited liability
How can a sole trader expand their business ?
Sole trader —> Partnership
OR
Sole trader —> Limited company (Ltd) —> Public limited company (Plc)
What is a sole trader ? And give examples
It is a business owned by one owner, but they can take on staff - they can employee people but they will not be involved in the control of the business
It tends to be a small business - it has Unlimited Liability
Examples include : Small sops, online traders, plumbers etc
What are the advantages and disadvantages of a Sole trader ?
Advantages:
- Easy to set up - no complicated forms
- Make decisions quickly as only you are in charge
- Less capital needed
- All profits kept but the owner
- Can offer personal attention to customers
- Don’t have to make any info about the company public
- They are their own boss
Disadvantages:
• Unlimited liability, this means that if the business has financial difficulties the sole trader could lose their own assets like their savings, house or car
• Difficult to raise money – seen as a risk
• Don’t have economies of scale (buying in bulk)
• No one to take over for ill-health or holidays
Whats a partnership ?
Two or more people - share the risks, costs and the responsibilities of being in business
• The profits and gains of the partnership are shared among the partners, unless the partnership agreement states otherwise
• Each partner is personally responsible for paying tax on their share of the profits and gains, and for their National Insurance contributions
• Partners raise money for the business out of their own assets and/or with loans
• The partners themselves usually manage the business, although they can delegate certain responsibilities to employees
• It is possible to have ‘sleeping’ partners who contribute capital investment to the business but are not involved in running the business
What are the advantages and disadvantages of Partnerships ?
Advantages:
• Easier than a sole trader to raise extra capital, as partners all have their own sources of finance e.g. savings
• Profits go to partners, which is very motivating
• Smaller business means good working
relationships
• No need to make public any information
• Partners contribute with range of skills
• Shared problems and decisions
Disadvantages:
- Unlimited liability
- Partners could have disagreements about - Control of business, sharing profits, Withdrawal from the partnership, inviting new partners into the business
What is a Private limited company ( Ltd ) ?
And give some examples
• Sole traders may grow and expand and want to become a ltd company
• Friends and family can buy shares in the business, this will make them part owners
• Shares cannot be bought by the public
• Owners control who buys the shares
• Expand by selling more shares, giving the business more capital
• Normally medium sized businesses
• Have the benefit of limited liability, those that own or buy shares in the business can only lose their original investment, their private assets remain safe
• Examples; building firms, scaffold firms, delivery business Eddie Stobart
What are the advantages and disadvantages of a Ltd ?
Advantages:
• Limited liability
• Can raise extra capital by selling more shares, to friends and family, making it easier to expand
• Can employ managers to run business if the owners don’t want to do it themselves
• Has its own legal status – separate from the shareholders
Disadvantages:
• Accounts of the company cannot be kept private:
• Audited each year
• Copy sent to Registrar of Companies
• Available for public to see
• More difficult and expensive to set up - more administration
• Cannot sell shares on stock exchange, which limits the amount of capital that it can raise
What is franchising ?
An entrepreneur may choose to set up with an established business name and buy a franchise
For example an entrepreneur at wish to open their own sandwich bar and call it “Bobs sandwiches” or they could buy the Subway franchise
What is a franchise ?
Imagine a company has a great and successful business. It wants to expand but it doesn’t want the problems and expense of opening more stores – so it sells the business idea.
If you buy a franchise it is a “business in a box”, as well as signage and training you get support of a national company and a brand that customers already know.
What is the difference between Franchisee and Franchisor ?
Franchisee - This is the business owner who is buying the rights
Franchisor - This is the business that is selling the rights e.g. Subway
What does a businessman need to consider before buying the franchise - in terms of cost ?
They need to consider the cost of buying the franchise rights at the start
And they also have to look at the monthly loyalty payment to the Franchisor
What are the pros and cons of franchising ?
Pros:
• The franchisor chooses the franchisees carefully – knows what characteristic that make a successful franchisee
• The franchisor decides how much money the franchisee must invest in the business
• The franchisor provides support – management advice & training – help franchisee solve problems.
Disadvantages:
• Franchisee’s do not have freedom of running their own business;
• Bound by rules e.g. Can’t vary product or price
• Franchisee pays percentage of profits in royalties
• Franchisee will never own the business outright
What is a social enterprise ?
A social enterprise is a business that trades for a social and/or environmental purpose
At the core of a social enterprise is the objective to help the planet in some way - they are not charities - as they don’t rely on donations
Whats the aim of a start-up business ?
The aim of a start-up business is to grow big enough to provide a return on investment ( ROI ) for investors
Whats the aim of a lifestyle business ?
The aim of a lifestyle business is to provide great quality of life for the owner - as owners start a business hoping to sustain a certain level of income - they might start a business doping something that they really enjoy
This allows an entrepreneur to live how they want and still run a business
Whats an online business ?
It’s a business which is easy to set up - for e.g. an eBay business could be up and running in an hour after some online form filling
Paypal is used to take money from customers and give it to the business owner
It’s a business which is available to the customer 24/7
It’s a business which can also be managed from anywhere, owner does not need to be sat in an office
What happens after a limited company ( Ltd ) has grown in size and needs further investment ?
The Ltd cannot get the investment from its current pool of owners therefore it may consider becoming a PLC
IF it intends to flow shares on the stock market so they can be bought by anyone, it will first need to issue a prospectus where potential investors are invited to purchase shares before flotation ( called a IPO )
Why is switching from a Ltd to a PLC expensive ?
This is because going public is expensive:
- Lawyers to draw up legal paperwork
- Publications
- Advertising and admin
- Company must have 50,000 GBP in share capital
