Understanding Business Types Flashcards
Describe sole traders
Sole traders are individuals who start trading.
- Legally there is no distinction between the individual and their business (for accounting purposes there is).
- Business activities all belong to the individual and they own and run the business.
As a sole trader are you liable for the debts of your business?
As a sole trader you are fully liable for the debts of the business.
- If the business cannot pay its debts, then the individuals will have to pay (they could lose all their personal possessions).
When a sole trader business makes a profit the individual pays…
Income Tax on that profit
What are some common professions of sole traders?
Butchers, bakers, plumbers, hairdressers, electricians
Describe partnerships
Partnerships are 2 or more people coming together with a view to making a profit.
- Partners own and manage business activities.
- Essentially they are like a group of sole traders so whilst we account for the business and individuals separately, legally there is no distinction between the business and the individual partners.
Are partners in a partnership liable for the debts of the parternship?
Partners are fully liable for the debts of the partnership.
Describe what a liability being joint and several means regarding partners being fully liable for the debts of the partnership
If one partner cannot meet their share of the liabilities then it would fall onto the other partner to make up that share.
Is thee fact that liability is split over the partners an advantage/disadvantage compared to sole traders?
Advantage
The profit will be __ amongst the partners and the __ of profit the partner receives they pay ___ ___ on.
- Split
- Share
- Income Tax
Describe a partnership agreement
- It will include profit sharing ration, details of partners’ salaries, interest on capital, and interest on drawings.
- Not mandatory
What happens if a partnership does not have a partnership agreement in place?
Rules of the Partnership Act 1890 apply (piece of legislation that covers how partnerships are run).
What are some common partnership sectors?
Doctors, dentists, solicitors
What is the set format for how partnership accounts must be prepared?
There is not a single format that is used, there is no set format
Describe Limited Companies
- A limited company is a separate legal entity that is recognised in law.
- The company is distinct from its owners (called shareholders) and its managers (called directors) although they may be the same people.
How do you form a company?
- You must register the company at Companies House.
Are the owners (shareholders) or managers (directors) liable for the company’s debts?
- No, the company itself is liable for its own debts.
- If the company cannot pay its liabilities, the shareholders and the directors will not be held personally liable.
Describe how suing works with companies
Unlike sole traders and partnerships, companies can directly sue or be sued by people and they can hold assets in their own names.
What act are companies regulated under?
Companies Act 2006 – they are required to file their accounts at Companies House so their financial information is publicly available.
What are the main types of companies?
- Private company (LTD)
- Public company (PLC)
What is the difference between a private company (ltd) and a public company (plc)?
- Public companies are allowed to advertise and sell their shares directly to the public but private companies are not.
- Companies that are listed on a stock exchange will be public companies.
What happens when an owner leaves a company?
Company continues to operate regardless of the ownership
What tax to companies have to pay on profits?
Corporation tax
When a company wants to pay profits out to shareholders it does so by paying a ___ to them.
Dividend
What format must companies file their accounts under?
A set format that is dictated by the Companies Act 2006.
Describe Limited Liability Partnerships (Big 4)
A limited liability partnership is a hybrid of a company and a partnership.
- In most respects it is like a company in that it is a separate legal entity (so it can be sued and sue in its own name, owners of the LLP get limited liability, etc).
- With an LLP (unlike a company) the Partners of the LLP are both the managers and the owners.
How are LLPs (Limited Liability Partnerships) taxed?
LLPs are taxed like partnerships so the LLP itself does not pay tax but the profits are allocated to the partners of the business who then pay Income Tax on those profits.
What are LLPs governed by?
Limited Liability Partnership Act 2000 - This means that LLP’s must be registered at Companies House and will have to file its accounts at Companies House.
What might some examples of an LLP be in terms of type of business?
Law firms, Big 4
How does transfer of ownership work in a partnership?
Can transfer share of firm (right to profits, assets on winding up etc) but cannot transfer right to participate in management.
How does transfer of ownership work in an LLP?
Can transfer share of firm (right to profits, assets on winding up etc) but cannot transfer right to participate in management.
Describe the termination process for a sole trader
When the sole trader chooses or is incapable of continuing
Describe the termination process for partnership
Strictly, whenever any partner gives notice, or is incapable of continuing.
- In practice most partnerships provide for firm to continue with the departing partner being paid off.
Describe Public Sector Organisations
- Public sector refers to organisations that are involved in the provisions of goods or services by and for the government at a national, regional, or local level.
- Some common areas where traditionally public sector services have operated include hospitals, schools, defence, and the police.
What are the goals of public organisations?
- The principal goal of a public organisation is to provide services which are deemed important by society, rather than most social organisations who are generally profit driven.
- Since these organisations are funded by the public through taxation revenues, it is important they demonstrate their efficiency in the allocation and use of their resources (maximising quality/quantity of service provided, balancing financial budget to ensure financial stability).
Describe not for profit organisations
Some organisations exist to bring benefits to society but are not necessarily owned by the government or funded by public (tax) money, e.g., a charity.
Describe a charity
A charity is a not-for-profit organisation that has the aim of philanthropic goals and social wellbeing.
- They must sill produce accounts.
- Managed by trustees.
Rules governing charities are contained within the ___ ___ ___ and they will be overseen by the ___ ___.
- Charities Act 2011
- Charity Commission
In general, how are charities taxed?
Generally they are exempt
Some not for profit organisations will exist with the purpose of raising money from its membership or customers which can then be used to provide…
Common services to all members of the organisations or society, e.g., National Building Society
Some not for profit organisations are membership-owned businesses with…
Membership open to those who use its services
Describe 3 objectives of non-profit making organisations
- Some not for profit organisations try and make a surplus (income more than costs on commercial activities such as a shop in the club house) which is used to meet the needs of their members (better rates of interest on borrowings/deposits etc).
- Charites’ goals are to provide a service to the whole of society or some specific target group.
- A member’s club, e.g., sports club, will have a goal to provide the members with a facility and appropriate environment within which to enjoy their membership.
What are 4 types of funding for businesses?
- Savings
- New capital introduced
- Profits retained
- Lending
Describe savings as a type of funding
- When an entrepreneur starts a business, it is usual for them to invest personal savings.
- Savings are put into the business bank account and effectively, this is the amount the business owes back to the owner.
- This type of finance does not cost the business anything as no interest is applied.
Describe new capital introduced as a type of funding
A sole trader or partnership may need additional cash in the business and the owners could choose to put this cash in themselves.
- The money the sole trader or partner puts into the business is called ‘capital’ which is usually invested at the start, and they may provide further ‘capital introduced’ at a later date to support growing the business or enable the business to operate.
- For a limited company, the money invested by the owners is used to buy shares in the company (‘share capital’). New shares could be issued to raise funds but if these shares are sold to new shareholders it can dilute the ownership of the company.
Describe profits retained as a type of funding
Profits is made by a business and if it is not paid out or taken out by the business owners it accumulates year on year, any accumulated profits which have been kept in the business are called ‘retained profits’
The profits generated by the business can be chosen to retained in the business, rather than distributed to the owners, to be used to reinvest and to grow the business.
What are 4 benefits to using retained profits to fund the business?
- No interest charges
- No dilution of ownership
- This source of finance does not require payments of dividends
- Very flexible as management have complete control on where to use the funds
Describe lending as a type of funding
- Business may borrow money to assist with cashflow, pay debts as they fall due, or to use for a planned investment.
- Business may approach a bank with a business plan and request a bank loan (bank will carry out credit checks to assess the worthiness and reliability of the business).
- The bank may request ‘security’ on a loan (if business cannot repay loan the bank can demand the sale of assets to raise money).
- Money will be lent for an agreed time period, and interest must be paid on the lump sun borrowed (usually a fixed %), and monthly repayments must be made.
What are 4 benefits to using lending to fund the business?
- Repayments of capital and interest are monthly and the amount is known in advance, allowing business to plan ahead. There will be regular cash outflows to repay the bank.
- While interest must be paid on the loan, there is no requirement to give the bank a share in the business.
- Loan period can be matched with the investment period hence the business will not continue to repay the loan after the project is completed, no need to worry about refinancing after the project.
- Interest on bank loans is tax deductible
Describe working capital management
Working capital management ensures liquidity by monitoring trade receivables, trade payables, stock management, and debt management.
It helps a company to keep sufficient liquid cash in the business at any point in time to pay the operational costs and short-term debts.
Describe working capital
Working capital is the short-term assets and liabilities of a business, the day-to-day financing of an organisation which is used to keep the business running smoothly.
What does working capital include (5)?
- Inventory (current asset)
- Receivables (current asset)
- Payables (current liabilities)
- Bank and cash (current asset with cash, current liability if overdrawn)
What is the equation for working capital?
Working capital = Current assets - Current liabilities
The finance function will manage the (3)…
- Receipt of money owed
- Payment of the payables
- Provide information to other departments as to the organisation’s cash flows.
A business can manage its working capital in such a way that…
Money is held in the business to use, rather than to pay out immediately.
This requires careful management since agreements and contracts should not be broken (e.g., credit period given to company by creditors).
A balance is required so a business does not hold too many assets as this ties up cash. Similarly, a business should not have too many current liabilities as this is monies owed.
What are 4 benefits to using working capital to fund the business?
- Provides a ‘cushion’ when the business needs extra cash.
- No interest is charged.
- Enables a business to pay debts as they fall due, fulfil customer orders, and invest.
- Maintains a good cash flow so the business can gain stability and financial strength.
What are some common features of business organisations?
- Interrelated Individuals
- Goal Congruence
- Co-operative relationships
Describe Interrelated Individuals
- An organisation is a social entity made up of people who have their own skill sets.
- The organisation will structure their human resources in groupings of those who have similar skills, e.g., those good at selling will make up the sales force, etc.
- The structure of the organisation will be determined by groups of interrelated individuals who work together.
Define Goal Congruence
Everyone working together towards a common objective
Describe Goal Congruence
- The overall strategy and mission of an organisation will be set at the top of the company, by the directors.
- This will be communicated down through the organisations, and team or individual targets may be set around the achievement of that strategy.
- Individuals will work to achieve their set targets, and as a group of interrelated individuals they will work towards departmental objectives.
- All departments with an organisation will strive to meet the overall strategy of the business hence goal congruence.
Describe co-operative relationships
- An organisation is a deliberately structured and co-ordinated activity system with co-operative relationships.
- There will be internal co-operative relationships within a business (teams and departments will work together, for example on a certain project, or for a certain large client)–there will be a common objective and skills may be shared to deliver the outcome.
- Internal departments may have a relationship with another department and provides a ‘service’ to that area, for example the IT department providing shared services, or the finance department providing data to the payroll department.
- External co-operative relationships are relationships with suppliers and customers–by forming these co-operative relationships, businesses can take advantage of improved product ranges, better quality good, better prices and contract terms, reduced logistical costs, joint marketing strategies.
Define responsibility
Refers to the obligation an individual has to fulfil a task that they have been given
Define authority
May be defined as the right to do something, or to ask someone else to do it and expect it to be done.
Responsibility to fulfil a task will be set out in…
Job roles and job descriptions
All individuals within an organisation should have a contract that both parties have signed, and this is an agreement where ownership of work has been assigned to them.
Describe delegation
Delegation involves the passing of authority from one party to another.
Although authority may be passed, responsibility remains with the original holder of authority.
Define a team
A team comprises people linked in a common purpose
Describe teams as being a feature of an organisation
- Teams are especially appropriate for conducting tasks that are high in complexity and have many interdependent subtasks.
- A team is a group that has a common purpose or goal and allocated membership.
- Teams normally have members with complementary skills and generate efficiencies through a co-ordinated effort which allows each member to maximise his or her strengths and minimise his or her weaknesses.
- High-performing teams are able to function as a unit as they find a way to get the job done smoothly.
Describe Division of Work
- Another common feature of an organisation is the division of labour.
- This is the task of breaking down a large job into small, more manageable tasks.
- These tasks can then be assigned to and completed by a group of workers in order to increase efficiency.
- Individuals, organisations, and teams have specialist knowledge and capabilities and the division of labour builds on these strengths (work is divided and allocated according to relative strengths).
Describe the difference between goods and services
- Goods are physical products such as food, clothing, and machinery whereas services are non-physical items such as training, hairdressing, and cleaning.
Describe manufacturing businesses
- Manufacturing businesses take raw materials and convert these into finished goods.
- Products are tangible, which means we can touch them.
- Products are made on a large-scale to meet demand from consumers.
- The manufacturing process will involve labour hours and machine hours to produce the finished goods. These finished goods may be stored in a warehouse to prior to sale.
What are the 3 most important types of inventory?
- Raw materials
- Work in progress (WIP)
- Finished goods
Describe 5 characteristics of a service
- Intangibility - service does not provide a physical product
- Lack of ownership - the consumer doesn’t own anything at the end of the service
- Inseparability - the service is usually provided at the same time as it is consumed
- Perishability - the service cannot be stored and used later
- User participation - the service cannot be separated from its provider or user
Why is inventory an important figure?
Inventory is an important figure as it is in the profit and loss within cost of sales, and it also a significant figure of on the Statement of Financial Position under current assets.
Labour and machine hours will also be monitored so that…
Any variances from the expected can be investigated.
Any increase in hours compared to the expected may indicate an inefficiency or a bottleneck in production so these need to be rectified.
Describe waste in manufacturing industires
- In manufacturing industries where finished goods are being produced there will be waste.
- This may be in the form of material waste or wasted labour hours perhaps due to idle staff.
- Waste should be tracked and should be eliminated.
- A manufacturing organisation may aim for ‘zero waste’ making the business highly efficient.
Define quality
Quality is defined as fitness for purpose.
Quality of both products and services will need to be measured to ensure customer satisfaction.
Define quality assurance for manufactured goods.
Quality assurance in manufactured goods is objective and measurable, a statistical process may be employed and goods sampled to test quality.
For example, every nth product will be removed from the production line and tested to ensure it works.
Define quality assurance for service organisations
Quality also needs to be measured.
Efficiencies in service delivery are more subjective and can be based around feedback from customers.
Describe internal accounts
We use manufacturing accounts to calculate the cost of producing finished goods.
They are prepared for management purposes only and are NOT for external publication.
When manufacturing accounts are prepared it is important to consider all different types of stock (raw materials, WIPs, and finished goods).
