Types of business Flashcards
What is a business
An entity of organization engaged in commercial, industrial or professional activities with the aim of making a profit.
In general, a business is involved in producing and selling goods (or in osteopathy form the product is treatment) to customers, who in turn pay for those goods or services.
– This exchange of goods or services for money is what allows a business to generate revenue and, ideally make a profit.
What are ethics
Ethics are principles or values that govern behaviour and decision-making, with a focus on what is right and wrong.
Relationship between business and ethics
Complex relationship.
Some people believe that business and ethics are incompatible, while others argue they are essential to each other.
Argument for them not being compatible:
– the primary goal of a business is to maximise profits and that ethical considerations can hinder this objective.
– From this perspective, businesses must compete in a competitive marketplace, and ethical concerns may put them at a disadvantage.
– Additionally, some argue that business ethics are subjective and vary from culture to culture, making it more difficult for companies to navigate complex ethical situations.
– sometimes ethical considerations can conflict with a company’s financial goals, but ignoring ethics entirely can have significant long-term consequences.
Argument for saying you need ethics in business:
– that ethical behaviour is essential for long-term business success.
– companies that act unethically may gain short-term profits, but they risk damaging their reputation and losing customers in the long run.
– Moreover, ethical behaviour is increasingly becoming an expectation of consumers, employees, and other stakeholders, and businesses that fail to meet these expectations may suffer consequences.
Ultimately businesses should strive to find a balance between financial success and ethical behaviour.
Sole trader
What is a sole trader:
– an individual operates and manages a business on their own. It is the simplest and most common form of business ownership
– As a sole trader, the individual is the sole owner and assumes full responsibility for the business’s operations, finances, and liabilities. They have complete control over decision-making and retain all profits generated by the business, but they also bear all the risks and losses
Advantages:
– it is easy to start and finish a sole trader business- its the simplest business format
– you just have to register as self employed, and make sure you register for VAT if this is necessary (but the TAX office will give you guidance on this)
– its your own business, so you are completely responsible for the business and make all the decisions and dont have to have anyone elses opinion to make them
– all the profits are yours- however you face all the losses as well
– privacy- you have privacy of your own finances and you only have to tell people your money due to taxation purposes
– lower taxes
– less paperwork- even though there still needs to be accounts and business records, the paperwork for a sole trader is much less
– easy to change- if you later decide that you want to change to a partnership or company, these changes will be less complicated than the other way round
Disadvantages:
– personal liability- you will be responsible for all debts and losses. if the business fails then you are fully liable and your personal assets are at risk. You could be made bankrupt.
– financial difficulties- there may be some financial difficulties, banks are wary of lending money especially to a sole trader. Many of the banks will want security and you will find your personal property at risk if you default on the loan. They may not offer the same discounts they might offer to a limited company.
– public perception- as a sole trader you can offer more of a personal service to customers, however some people like to use a bigger company as they like the protection that it brings
– competition- if your main competitors are sole traders, then you can compete with them on equal footing, but it is harder to survive if a larger company sets up in competition to you
– very time demanding and is a heavy personal commitment. Like any time off you need, whether this be due to illness or other reasons, can have an affect on the business. If there is no family member that is ready and willing to carry on the business, then bankruptcy is the most likely result
As qualified osteopaths the most
Partnership
There are 2 types of partnership, general and limited
General partnerships:
– a general partnership is a business arrangement by which 2 or more individuals agree to share responsibilities, assets, profits and financial and legal liabilities of a jointly-owned business
– The partners also have joint authority and responsibility for managing the business and making decisions. Like sole traders, general partners have unlimited personal liability for the partnership’s debts and obligations
Limited partnership:
– type of partnership that consists of 2 types of partners, general partners and limited partners
– the general partners have the same characteristics and responsibilities of those in general partnerships- liability, responsibilities, assets, profits and financial and legal responsibilities
– the limited partners have limited liability and do not participate in the day-to-day management of the business
– the limited partners typically contribute capital or assets to the partnership but do not actively engage in managing the business. They receive a share of the profits and losses but are shielded from personal liability beyond their investment in the partnership.
– general partners, on the other hand, have unlimited liability for the parternship’s debts and obligations
– limited partnerships are often used when there is a need for additional investment capital, and the general partner(s) may seek funding from limited partners who are willing to invest but prefer to have limited liability and a passive role in the partnership’s operations
Advantages:
– partnerships are relatively easy to establish, however, time should be given in preparing and developing a partnership agreement
– as there will be more than 1 owner, the ability to raise funds may be increased
– profits from the business flow directly to the partners’ personal tax returns
– prospective employees may be attracted to the business if they are given the incentive to become a partner, either now or in the future
– the business will benefit from partners who have complementary skills
Disadvantages:
– partners are jointly liable for the actions of other patterns (unless a partner with limited liability in a limited liability partnership)
– profits must be shared with others
– as decisions are shared, disagreements can occur
– some employee benefits are not deductible from business income and tax returns
– the partnership may have a limited life- it may end upon the death or withdrawal of a partner
The circumstances for and the consequences of dissolution can be specified in a partnership agreement.
However if they are no specified, the general provisions of the partnership act 1890 (PA) can be applied. Under the PA, a partnership is dissolved should any of the following events occur:
– notice- a notice of dissolution can be given by any partner to the other or others.
– expiry of fixed term- a partnership will dissolve on the expiry of a pre-agreed fixed term
– completion of project- if the partnership was entered into to do a specific objective, when that objective has been reached or that thing done, the partnership is automatically dissolved
– death or bankrupcy
– illegality
Limited liability partnership
What is an LLP:
– limited liability partnerships are a flexible legal and tax entity that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners
– the individuals members of the LLP have limited liability
– it is a separate legal entity:
—- LLP is taxed as a partnership for tax purposes. The members are taxed as partners, each being liable for tax on their share of any income or gains (if they put 20000 in, that’s all they can be liable for)
Advantages:
– as with general partnerships, as there will be more than 1 owner, the ability to raise funds may be increased
– again, as with general partnerships, profits from the business flow directly to the partners’ personal tax returns
– prospective employees may be attracted to the business if they are given the incentive to become a partner, either now or in the future (just like general partnerships)
– again, just like general partnerships, the business will benefit from partners who have complementary skills
– limited liability
– flexibility to administer own internal governance
– continue after death of partners
– only liable to the funds they put in
Disadvantages:
– profits must be shared
– as decisions are shared, disagreements can occur, need for good partnership agreement
– some employee benefits are not deductible from business income or tax returns
– it is subject to registration procedures with the registrar of companies
– it must file accounts and tax returns to the registrar
Companies
A company is a legal entity that is formed to conduct business activities.
It is a separate legal entity from its owners (shareholders or members) and is recognised as a distinct entity under the law. The purpose of a company is to engage in commercial activities, generate profits, and provide goods or services.
Private limited company:
– limited liability for its shareholders, and restrictions on the transfer of shared.
Public limited company:
– company that can offer its shared to the public
– often larger in scale and has more stringent regulatory requirements and reporting obligations compared to private limited companies.
Limited liability company (LLC):
– flexible business structures that combines elements of both partnerships and corporations. It provides limited liability protection to its owners while allowing flexibility in management of taxation. LLC’s are often chosen by small and medium sized businesses
Advantages:
– separate legal entity- has a legal existence separate from management and its shareholders.
– members liability is limited- probably the key advantage of incorporation, if things go wrong, a members’ only loss is the value of the shares, personal assets are not put at risk
– protection of company name- the choice of company names is restricted and, providing a chosen name complies with the riles, no one else can use it. The only protection for sole traders and partnerships is trademark legislation
– continuity- once formed, a company has everlasting life. Directors, management and employees act as agents of the company.
– new shareholders and investors may be introduced with the agreement of existing shareholders
– easier to secure finance, a lending bank may be more willing to lend to a company
– better pension schemes
– taxation
Disadvantages:
– cost- will involve a cost set up although perhaps not as expensive as some people may believe
– complex accounts- there are more complex and restrictive rules governing the accounts and bookkeeping of limited companies than sole traders
– restricted capital raising
– dilution of powers- sometimes disputes will arise between directors and shareholders as their ideas of what is best for the company vary
what is incorporation of a business
Incorporation is the legal process used to form a corporate entity or company.
A corporation is the resulting legal entity that separates the firms assets and income from its owners and investors.
