Unit 1 - Business Activity and Influences on Business ( Sole Traders, Partnerships, Social Enterprises and Franchises)

Question 1

Types of Business Organisations

Answer 1

Vary according to size, type of ownership and legal status.

Question 2

Legal Status

Answer 2

Position defined by law.

Question 3

Entrepreneurs

Answer 3

People who set up businesses - owners. Without them, the business would not exist in the private sector.
- Innovators - try to make money out of a business idea (sorting a gap in the market, market research, a new invention) - may copy or adapt ideas.
- Organisers - responsible for organising ‘other’ factors of production (buy or hire resources which are used to make a product or service).
- Decision Makers - make all key decisions e.g. raise finance, product design, choice of production methos, recruitment.
- Risk Takers - risk losing money they put into the money - if successful, rewarded with profit.

Question 4

Unincorporated and Incorporated Businesses

Answer 4

Vary according to the legal form they take:
- Unincorporated - businesses where there is no legal distinction between owner and the business - everything carried out in the name of the owner - tend to be small and owned by individual or group of individuals.
- Incorporated - separate legal identity from that of its owners - can sue, be sued, taken over or liquidated - often called limited companies and the owners are shareholders.

Question 5

Features of a Sole Trader

Answer 5

Simplest form of Business Organisation:
- One owner
- Can employ many people
- May be involved in wide range of business activities and sectors
- Mostly found in tertiary sectors
- Set-up easy as no legal requirements - but can be forced to pay off company debts out of own pocket.

Question 6

Advantages of Sole Trader

Answer 6

1. Owner keeps all profit
2. Independent - owner has complete control
3. Simple to set-up with no legal requirements
4. Flexibility - can adapt to changes quickly
5. Can offer personal service because they are small
6. May qualify for government funding

Question 7

Disadvantages of Sole Trader

Answer 7

1. Have unlimited liability
2. May struggle to raise finance - considered too risky by those that lend money
3. Independence may be too much of a responsibility
4. Long hours and very hard work
5. Usually too small to exploit economies of scale
6. No continuity - business dies with the owner

Question 8

Partnerships

Answer 8

Exists when in between 2 and 20 people own a business together - the owners share responsibility, profits.
No legal formalities to complete - however deed of partnership may be formed.

Question 9

Deed of Partnership

Answer 9

Legal document that states partners rights in the event of a dispute:
- how much capital each partner will contribute
- how profits (and losses) will be shared among the partners
- procedure for ending the partnership
- how much control each partner has
- rules for taking on new partners

Question 10

Advantages of Partnerships

Answer 10

1. Easy to set-up and run - no legal formality
2. Partners can specialise in their area of expertise
3. The job of running a business is shared
4. More capital can be raised with more partners/owners
5. Financial information is not published

Question 11

Disadvantages of Partnerships

Answer 11

1. Partners have unlimited liability
2. Profit has to be shared
3. Partners may disagree and fallout
4. Any partners decision is legally binding to all
5. Tend to be small

Question 12

Limited Partnerships

Answer 12

Some partners provide capital but do not take part in the management of the partnership - limited liability. Must always have on partner with unlimited liability.

Question 13

Features of Franchises

Answer 13

Owners are called Franchisors - they have developed successful businesses and allow others, Franchisees, to trade under their name.

Question 14

What does the Franchisor offer the Franchisee

Answer 14

• A license to trade under a recognised brand name of the Franchisor.
• Start up package including help, advice and essential equipment (brand materials).
• Training in how to run a business and the systems used by the franchise.
• Materials, equipment and support services that are needed to run the business.
• Marketing support that is organised on behalf of all Franchisees.
• Exclusive area in which to operate the Franchise - means no competition from other Franchisees.

Question 15

In return for these services the Franchisee has to pay certain fees.

Answer 15

1. A one-off start-up fee.
2. Ongoing fee (usually based on sales).
3. Contribution to marketing costs.
4. Franchisors may make a profit on some of the materials, equipment and merchandise supplied to Franchisees.

Question 16

Advantages to the Franchisee

Answer 16

• Less risk - a tried and tested idea is used
• Back-up support is given
• Set-up costs are predictable
• National marketing may be organised

Question 17

Disadvantages to the Franchisee

Answer 17

• Profit is shared with the Franchisor
• Strict contracts have to be signed
• Lack of independence - strict operating rules apply
• Can be an expensive way to start a business

Question 18

Advantages to the Franchisor

Answer 18

• Fast method of growth
• Cheaper method of growth
• Franchisees take some of the risk
• Franchisees are more motivated than employees

Question 19

Disadvantages to the Franchisor

Answer 19

• Potential profit is shared with Franchisee
• Poor Franchisees may damage brand reputation
• Franchisees may get merchandise from elsewhere
• Cost of support for Franchisees may be high

Question 20

Features of Social Enterprises

Answer 20

Aim to improve human and environmental well-being rather than making profit:
- Have clearer or social environmental mission
- Generate most of income through trades or donations
- Re-invest most of the profits
- Are majority controlled controlled in the interests of the social mission
- Are accountable and transparent

Question 21

Social Enterprises may take various forms

Answer 21

• Cooperatives - company, factory or organisation in which all the people working there own an equal share of it.
• Consumer Cooperative - owned by Customers
• Retail Cooperative - Retail members who often work together to assert their purchasing power
  Worker Cooperative - owned by employees
  Charities - organisations that give money, goods or help to people who are poor, sick or in need

Cooperatives usually operated as customer cooperatives or retail cooperatives - owned and controlled by members who can buy shares which entitle them to elect directors to make key decisions - profit made by the cooperative is given to members.