Types of ownership Flashcards
describe a sole trader
owned by one person
may employ others to help
no legal formalities
once turnover reaches £83000, must register for VAT
must abide by all employment legislation
no diff. between business owner and business itself
sole trader = unincorporated business
business owner liable for any debts: unlimited liability
home/assets may be at risk
advantages and disadvantages of being a sole trader, give 3 for each
adv:
quick and easy to be a sole trader
any profit after tax is kept by business owner
complete control and free to make all decisions
has flexibility
disadv:
unlimited liability
difficult to raise finance - money for expansion comes from profits or savings
immense pressure due to independence
limited range of skills present
define a partnership
the relation between persons carrying on business with the common view to profit
they are between 2 and 20 people and usually share responsibility and profits
there are no legal formalities to complete when a partnership is involved
give 3 issues a deed of partnership covers
how much capital each partner will contribute
how profits and losses are shared amongst the partners
the procedure for ending a partnership
give three advantages and disadvantages of partnerships
adv:
wider range of skills available - each partner can specialise, share key ideas and decisions
more finance can be raised - each partner can financially contribute to the business
share workload and cover during illnesses and holidays - growing business and expanding profits, able to take on more work
disadv:
decision making may be slower as all partners must be consulted - partners may disagree leading to break-up of organisation
profits have to be shared - lower financial reward
individual partners have unlimited liability
describe limited companies
exist separately from their owners (shareholders)
employees employed by Ltd
assets belong to Ltd
business exists in the eyes of the law - incorporation
legal action against business not shareholder
shareholders only liable to lose the money invested in the business - limited liability
run by directors appointed by shareholders
chairperson and board of directors accountable to shareholder and run the business as they wish
directors can be voted out at the annual general meeting (AGM) if business doesn’t run to shareholders’ expectations
limited companies pay corporated tax
what are two documents that need to be produced to set up a limited company
memorandum of association - details of the company
articles of association - details on the running of the company
what is the difference between public (PLC) and private limited companies (Ltd)
public limited companies trade their shares on the stock market, shares on these stock markets are freely bought and sold so the ownership of PLCs changes all the time, which has very little impact
shares in private limited companies can only be transferred privately and all shareholders must agree on the transfer, often in family businesses owned by family members or close friends, directors of the firm tend to be shareholders and involved in running of the business
give three advantages and disadvantages of private limited companies
adv:
limited liability - do not risk personal assets so people are more prepared to invest
more capital raised - can sell shares or gain easier access to loans from banks
control can’t be lost - shares can only be sold to new members if all shareholders agree
disadv:
legal procedure to set up business - takes time and money, more expensive procedures to follow like AGM
firms aren’t allowed to advertise shares to the public - the amount of capital raised can be restricted
profits shared out to a much larger number of people
describe PLCs
larger
make up 1% of limited companies
contribute more to national output
employ lots of people
shares can be bought and sold on the stock exchange
must provide a statutory declaration - requirements of all the company acts have been met
going public is expensive as lawyers need to ensure that prospectus is legally correct
glossy publications need to be available
company has big advertising and administrative expenses
must have minimum £50000 share capital
advantages and disadvantages of PLCs
adv:
huge amounts of money can be raised - from sale of shares to the public, can be used to fund expansion
dominate the market and production costs lower - firms gain economies of scale
easier to raise finance and loans from banks - more proven track record and must publish their accounts so banks perceive them as lower risk
disadv:
may be divorce of ownership and control - interests of the business may be ignored
very expensive to set up PLCs as anyone can buy shares - outside interest can buy control of the company
company accounts can be inspected by members of the public - more info. shared and competitors can use these to their advantage
evaluate the factors affecting choice of the legal structure of the business. give 6
objectives of owners - growth, profit maximisation, social purpose, control over working life
finance available - financial cost in becoming limited company so cash flow position should be stable before consideration
stage in businesses lifetime - for newly formed businesses, owners will choose sole trader or partnership
target market - if business has small target market then may choose to be sole trader
skills needed - if skills/workload need to be shared a a partnership may be good
need for finance - being a limited company is one way firms can raise finance to fund growth
evaluate the sole traders’ importance and impact of legal structure to various stakeholders
owners/shareholders:
owner takes on all the risks
gain all the profits and rewards
customers:
benefit from tailored products
high levels of customers service
higher degree of risk especially of goods which may be paid in advance
suppliers:
higher degree of risk - may be less willing to offer credit terms
evaluate the partnerships’ importance and impact of legal structure to various stakeholders
owner/shareholder:
share workload
wider pool of skills
must agree to abide by the decisions of the other partners since they are an unincorporated business
share profits - higher level of profits
customers:
may receive a greater range of products/services
suppliers:
higher degree of risk due to unlimited liability (similar to sole trader)
evaluate the Ltds’ importance and impact of legal structure to various stakeholders
owner/shareholder:
shareholders have limited liability - can only lose what they invest
shares can’t be sold to general public - limits potential for raising capital
customers:
firm can raise more capital - invest in development of new products
employ staff with greater range of skills
suppliers:
may only recover debts from the business, not from the shareholders
