Topic 3

Question 1

Explain what a sole trader is

Answer 1

A sole trader is a business that is owned and controlled by one person

Question 2

Give four advantages of a sole trader, giving a brief description for each

Answer 2

Low start up costs - easy to set up and relatively cheap
Profits - sole traders get to keep all profits
Control - sole traders are their own boss and make all decisions without having to consult anyone
Finances are private - not legally required to publish their financial statements

Question 3

Give four disadvantages of a sole trader, giving a brief description for each

Answer 3

Unlimited liability - if the sole trader’s business goes bankrupt, their private personal possessions can be taken to repay the debt
Raising capital - difficult to raise money as banks are reluctant to lend money to sole traders
Work long hours - long hours and are restricted on the holidays they can take
Lack of expertise - no one to help make decisions or to share responsibility

Question 4

Explain what a partnership is

Answer 4

A partnership is when 2-20 people share ownership of a business

Question 5

Give five advantages of a partnership, giving a brief description for each

Answer 5

Raising capital - easier to raise capital compared to sole traders as more people involved and banks view them as less risky
Effective decision making - partners can discuss problems and arrive at the best decision
Shared workload - partners can share the workload
Expertise - partners can contribute specific skills or specialise in an area
Finances are kept private - not legally required to publish their financial statements

Question 6

Give three disadvantages of a partnership, giving a brief description for each

Answer 6

Unlimited liability - if a partnership business goes bankrupt, their private personal possessions can be taken to repay the debt
Conflict - partners may disagree on decisions, which can lead to conflict
Lack of continuity - partnerships dissolve if partners fall out or die

Question 7

Explain what a private limited company is

Answer 7

A private limited company can only sell shares to family and friends

Question 8

Give four advantages of a ltd, giving a brief description for each

Answer 8

Limited liability - shareholders are not liable for their debts of the company, they will only lose the money they invested
Raising capital - easier to raise capital by selling shares and no limit on the number of shareholders
Specialisation - a greater number of directors can allow them to specialise in areas that they are strong at
Control - shares cannot be sold publicly so shareholders are protected from hostile takeovers

Question 9

Give three disadvantages of a ltd, giving a brief description for each

Answer 9

Restrictions on raising capital - shares cannot be sold on the stock exchange, which makes it harder to raise capital
Lack of privacy - financial statements are not kept private, which allows competitors to inspect them
Setup costs - setup can be time consuming and costly

Question 10

Explain what a public limited company is

Answer 10

Public limited companies can sell shares on the stock exchange

Question 11

Give three advantages of a plc, giving a brief description for each

Answer 11

Limited liability - shareholders are not liable for the debts of the company, they will only lose the money they invested
Raising capital - shares can be sold on the stock exchange, therefore large amounts of capital can be raised
Economies of scale - due to their large size they can buy in bulk and sell goods cheaper per unit

Question 12

Give three disadvantages of a plc, giving a brief description for each

Answer 12

Setup costs - very complicated and expensive set up process
Lack of privacy - financial statements are not kept private, which allows competitors to inspect them
Divorce of ownership and control - shareholders own the business but directors run it, difficulties arise when directors do not act in the best interest of shareholders

Question 13

Explain what a franchise is

Answer 13

A franchise is when a franchisor will sell franchisees the right to trade under their business name

Franchisor - is the business eg McDonald’s
Franchisee - is the person buying into the business

Question 14

Give four advantages of a franchisee, giving a brief description for each

Answer 14

Well known brand name - the franchisee gets the confidence of buying into an already established business, which increases sales and profits
Training and support - the franchisee will get assistance from the franchisor in a wide range of areas
Less risk - the franchise will already have established customers and established products, meaning guaranteed sales
Access to finance - banks consider them less risky, so it’s easy to obtain finance

Question 15

Give four disadvantages of a franchisee, giving a brief description for each

Answer 15

Fees - the franchisee will have to pay the franchisor an initial up front fee and also an agreed percentage of the profits annually
Lack of control - the franchisee will be given strict guidelines on how the business must be run by the franchisor
Interdependency - the negative actions of other franchisees can have an adverse effect on all other franchisees

Question 16

Give two advantages of a franchisor, giving a brief description for each

Answer 16

Growth - franchising allows the business to expand quickly without having to invest money
Profits - additional franchises will increase profits for the franchisor as they will receive up front fees and royalties

Question 17

Give two disadvantages of a franchisor, giving a brief description for each

Answer 17

Loss of control - the franchisee will manage the day to day running of the business, if the franchisee is poor it can affect the brand image
Diseconomies of scale - if the franchisor grows to quickly, it will be difficult to coordinate, control and communicate

Question 18

Explain what a social enterprise is

Answer 18

A social enterprise is a business with the following features;
Primarily social objectives eg employ those less well off
Profits are reinvested in the business or community
Not driven by the need to maximise profits for shareholders/owners

Question 19

Give three advantages of a social enterprise, giving a brief description for each

Answer 19

Profits for change - profits are reinvested in order to generate a positive social image
Revenues for change - money the business earns can be used to fund training, employment opportunities and help the environment
Better corporate image - members of the public like to support these businesses as they are not solely driven to make a profit

Question 20

Give three disadvantages of a social enterprise, giving a brief description for each

Answer 20

Dependency of funds - the amount of funds available is dependent on the amount of funds raised
Profits - the owners make very little money as they put a lot of the money made back into the business
Training costs - these are very high for employees as they often have very little qualifications

Question 21

Explain what the charitable and voluntary sector is

Answer 21

The voluntary sector refers to those businesses whose primary purpose is to create social impact rather than maximised profits, eg local youth clubs, YMCA, etc

A charity must have a charitable aim, eg relief of poverty, homelessness, drug addiction eg PIPS, Oxfam and Samaritans

Question 22

Give three advantages of the charitable and voluntary sector, giving a brief description for each

Answer 22

Charity work - all money gained is used to help those who need it most, eg sick,elderly, etc
Affordable products - products tend to be cheaper than high street retailers, which can be more affordable for consumers
Lower costs - charities have lower costs due to voluntary workers and no rates to pay

Question 23

Give three disadvantages of the charitable and voluntary sector, giving a brief description for each

Answer 23

Dependency of funds - the amount of funds available is dependent on the amount raised
Greater risk - some people perceive the quality of second hand products to inferior and won’t buy them
Expenses - many charities have expensive salaries to pay for directors/head office, travel expenses must also be paid for volunteers