Topic 4 - Business organisations (sole traders, partnerships, limited companies) Flashcards
What are the characteristics of a public sector organisation?
- Owned and operated by the government/state
- Objective to serve the community (usually provide a
service rather than aiming to make a profit) - Financed from public revenue (e.g. taxes which
companies and individuals pay, duties etc.) - Some of the services provided are for free (e.g. hospitals, libraries and education until 18)
- Some of the services are paid (e.g. travelling by bus)
What are some examples of public sector organisations?
- Government health service
- Tax authority
- Public schools
- Police
- Public library
What are private sector organisations?
All profit-making businesses that are not run or operated by the government. They are owned by an individual or corporation with the main aim of making profit.
What are the four different types of private sector organisations?
- Sole traders
- Partnerships
- Private limited companies (LTD)
- Public limited companies (PLC)
What are sole traders?
An individual who owns their own business. They are the only financial beneficiary of its success but also financially responsible if the business fails.
What responsibilities does a sole trader have?
A sole trader has unlimited liability.
What is unlimited liability?
Being fully responsible for the debts of the business which means you may have to sell your belongings (e.g. car, house) to pay this debt. If you cannot cover all outstanding debts, you may be forced to declare yourself bankrupt.
What are the advantages and disadvantages of a sole trader?
Check booklet page 4.
What is limited liability?
Being responsible for the business debts only up to the capital you originally invested.
What are the characteristics of a partnership?
- Has 2-20 owners
- Owners have unlimited liability
- A deed of partnership (formal agreement) is drawn up
(i.e. to show how profits and losses are shared) - Obey the Partnership Act 1890 (UK)
What is a general partner?
A partner that is liable for all debts of the partnerships (unlimited liability).
What is a limited partner?
A partner with limited liability. These partners cannot take part in management.
What are the characteristics of a limited partnership?
- At least one partner must be a general partner
- Limited partners have limited liability unless they break
the regulations relating to the involvement in
partnership (2 points below). All limited partners must be
registered with the Registrar of Companies. - Partners are not allowed to take out or receive back any
part of their contribution to the partnership during its
lifetime - Partners are not allowed to take part in the management
of the partnership business
What is the deed/agreement of partnership?
A document that sets out the terms and conditions for a partnership. It has no specific requirement by law so it can contain as much or as little as the partners wish and can help solve any arguments later.
What does a deed/agreement of partnership usually include?
- Capital or equity contributed by each partner
- Profit and loss share ratio
- Salaries paid to partners
- Interest (if any) to be paid on capital
- Interest (if any) to be charged on partners’ drawings
What does the Partnership Act dictate in the absence of a partnership agreement?
- Profit and loss shared equally
- 5% interest on loans from partners
- No salaries paid to partners
- No interest to be paid on capital
- No interest to be charged on partners’ drawings
What are the advantages and disadvantages of a formal partnership agreement?
Check booklet page 6.
What are the advantages and disadvantages of a partnership?
Check booklet page 6.
What is incorporation?
A process that allows the company to create its own legal identity and have separate legal status. Company must be registered with the Registrar of Companies and comply with the Companies Act 2006.
How does a separate legal status allow?
- Owner can have limited liability
- Allows for divorce of ownership
What is divorce of ownership?
Owners do not have to be involved in the business and, as owners, are separate from the day-to-day running of the business. Managers are responsible for running the business and making decisions on behalf of the owners.
What are shares?
The equal parts into which a company’s capital is divided.
What are shareholders?
A person who invests capital in a limited company and owns shares in the company.
What is an auditor?
An independent accountant which checks and approves the accounts of a limited company to ensure the accounts are accurate and show a ‘true and fair’ view of how the business is doing.
