UNIT 1 - Chap 4: Types of business organisation

Question 1

Sole trader?

Answer 1

Is a business owned by one person

Question 2

Advantages of a sole trader? (2)

Answer 2

• There were few legal regulations when he set up the business.
• He is his own boss. He has complete control over his business and there is no need to consult with or ask others before making decisions.

Question 3

Disadvantages of a sole trader? (2)

Answer 3

• Has have no one to discuss business matters (only his/her ideas)
• They do not have the benefit from limited liability. The business is not a separate legal unit. They are therefore fully responsible for any debts that the business may have.

Question 4

Partnership?

Answer 4

Is a form of the business in which 3 or more people agree to jointly own a business

Question 5

Partnership agreement? *

Answer 5

Is the written and legal agreement between business partners. It is not essential for partners to have such an agreement but it is always recommended

Question 6

Advantages of a partnership? (2)

Answer 6

• More capital could now be invested into the business as 2 peoples are invested into it this would allow expansion of the business.
• The responsibilities of running the business were now shared. Absences and holidays did not lead to major problems as one of the partners was always available.

Question 7

Disadvantages of a partnership? (2)

Answer 7

• The partners did not have limited liability. If the business failed, then creditors could still force the partners to sell their own property to pay business debts.
• The business did not have a separate legal identity. If one of the partners died, then the partnership would end.

Question 8

Limited liability?

Answer 8

Means that the liability of shareholders in a company is limited to only the amount they invested.

Question 9

Unlimited liability?

Answer 9

Means that the owners are responsible for the debts of the business they own. Their liability is not limited to the investment they made in the business.

Question 10

Unincorporated business?

Answer 10

Is one that does not have a separate legal identity. Sole traders and partnerships are unincorporated businesses.

Question 11

Incorporated businesses?

Answer 11

Are companies that have separate legal status from their owners.

Question 12

Shareholders?

Answer 12

Are the owners of a limited company. They buy shares which represents a partnership of the company.

Question 13

Private limited companies?

Answer 13

Our businesses owned by shareholders but they can’t sell shares to the public

Question 14

Public limited companies?

Answer 14

Businesses owned by shareholders but they can sell shares to the public and their shares are tradable on the stock exchange

Question 15

Dividends?

Answer 15

Are payments made to shareholders from the profit (after tax) of the company. They are the return to the shareholders for investing in the company.

Question 16

Advantages of private limited companies? (2)

Answer 16

• Shares can be sold to a large number of people. The sale of shares could lead to much larger sums of capital to invest in the business than the two original partners could manage to raise themselves. The business could therefore expand more rapidly.
• All shareholders have limited liability. It means that if the company failed with debts owing to creditors, the shareholders could not be forced to sell their possessions to pay the debts.

Question 17

Disadvantages of private limited companies? (2)

Answer 17

• There are significant legal matters which have to be dealt with before a company can be formed.
• The shares in a private limited company cannot be sold or transferred to anyone else without the agreement of the other shareholders.

Question 18

Advantages of public limited companies? (2)

Answer 18

• This form of business organisation still offers limited liability to shareholders.
• It is an incorporated business and has a separate legal identity to the owners or shareholders.

Question 19

Disadvantages of public limited companies? (2)

Answer 19

• The legal formalities of forming such a company are quite complicated and time-consuming.
• There are many more regulations and controls over public limited companies in order to try to protect the interests of the shareholders.

Question 20

Franchise?

Answer 20

Is a business based upon the use of brand names, promotional logos and trading method of existing successful businesses. The franchisee buys the license to operate the business from the franchisor.

Question 21

Joint venture?

Answer 21

Is where two or more businesses start a new project together, sharing capital, masks and profit

Question 22

Advantage to the franchisor? (2)

Answer 22

• The franchisee buys a licence from the franchisor to use the brand name
• The management of the outlets is the responsibility of the franchisee

Question 23

Disadvantages to the franchisor? (2)

Answer 23

• Poor management of one franchised outlet could lead to a bad reputation for the whole business
• The franchisee keeps profits from the outlet

Question 24

Advantages to the franchisee? (2)

Answer 24

• The chances of business failure are much reduced because a well-known product is being sold
• All supplies are obtained from a central source – the franchisor

Question 25

Disadvantages to the franchisee? (2)

Answer 25

• Less independence than with operating a non-franchised business
• Licence fee must be paid to the franchisor and possibly a percentage of the annual turnover

Question 26

Advantages of joint ventures? (2)

Answer 26

• Sharing of costs – very important for expensive projects such as new aircraft
• Risks are shared

Question 27

Disadvantages of joint ventures? (2)

Answer 27

• If the new project is successful, then the profits have to be shared with the joint venture partner
• Disagreements over important decisions might occur

Question 28

Advantages of public corporations? (2)

Answer 28

• Some industries are considered so important that government ownership is thought to be essential.
• If an important business is failing and likely to collapse, the government can step in to nationalise (transfer from priv to state) it.

Question 29

Disadvantages of public corporations? (2)

Answer 29

• Often there is no close competition to the public corporations. There is therefore a lack of increase of consumer choice
• Governments can use these businesses for political reasons, for example, to create more jobs just before an election.

Question 30

Public corporations?

Answer 30

These are wholly owned by the state or central government.