Understanding different business forms Flashcards
What is a sole trader?
Single person who is the exclusive owner of a business
Can still have employees and owner is entitles to keep all of the profits after tax
Personally liable for the busienss’ debts
Advantages of being a sole trader
They are the easiest type of busienss to set up
The sole trader gets to be their own boss
The sole trader devides whta to do with the profit
It is easy to change the legal structure if circumstances change
Disadvantages of being a sole trader
Unlimited liability means there is no olegal distinction between the sole trader’s assets and the business’ assets
Can be hard to raise finance as banks often see sole traders as riskier
All the responsibility for making business decisions is yours. Having someone to share decision making with can improve performance
Can be harder rto retain good employees as they aren’t necessarily given a share of the profits
What are private limited companies?
Companies where ownership of shares is restrictred. For the company to sell shares, all currebt shareholders must agree to sell them (Ltd)
Advantages of Ltds
Shareholders have limited liability
Ownership is restricted, all shareholders must agree to sell shares, meaning owners retain lots of control over how the busienss is managed
Normally easier for a limited company to get a loan than it is for partnerships, as a company is normally seen as less risky, should increase a company’s access to finance
Disadvantages of Ltds
Finance is needed to incorporate a businesss. Upfront fee as well as costs associated with paperwork, means it may not be possible for smaller firms (or brand new firms)
Company is legally obligated to publish their accounts each year (unlike sole traders and partnerships), competitors may use these to become more competitive
Disadvantages of Ltds
Finance is needed to incorporate a businesss. Upfront fee as well as costs associated with paperwork, means it may not be possible for smaller firms (or brand new firms)
Company is legally obligated to publish their accounts each year (unlike sole traders and partnerships), competitors may use these to become more competitive
What is a public limited company?
Sells shares on the stock exchange
Firms often become public companies when wanting to expand because selling shares on the stock exchange allows them to raise finance for investment
Advanatges of public limited companies
Selling shares on a stock exchange allows companies to raise money for investment, enabling the company to grow faster or bigger
Much easier for companies to raise capital from banks if they are public limited companies because they present less of a risk (given the number and size of investors)
Shareholders have limited liability because the company is incorporates
Disadvantages of public limited companies
Owners often have very little say in how the business is run, meaning it can be hard to agree on how the business is run
Anyone can take over the company if they are able to buy enough shares. When shareholders own more than half the shares, they will have control over the company
Company’s account must be made public. This means that competitors can see how well the company is doing
What is a not-for-profit
Any profit made is reinvested in the business
No profit can be kept by the owners
What are the types of not-for-profits?
Charities
Unincorporated association
Social enterprise
Charities
Getting charitable status lets a business get tax relied and lets it apply for certain grants. For a business to get charitable status, they must follow rules and regulations
Unincorporated association
People who manage it have unlimited liability
They get no profit and are legally responsible for all the organisation’s debt
Social enterprise
Make a surplus selling goods or services
Profit is reinvested to support the social enterprise’s aim
