1. Understanding Business Flashcards by Alicia Slade

What is a sole trader?

-an individual who owns and runs the business

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What is a partnership?

-a number of individuals between 2-20 working together in business and sharing profits

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What is a limited liability partnership?

-number of individuals working together which has been incorporated as a separate legal entity

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What is a private limited company?

-separate legal entity
-shares are not traded on stock exchange

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What is a public limited company?

-separate legal entity
-shares are traded on stock exchange

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What is a not-for profit organisation?

-charities and public sector organisations
-the money is used to achieve objectives

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What are key characteristics of a sole trader?

-owner is independent
-all profits belong to them
-easy to set up
-owner has unlimited liability
-can invest personal capital
-hard to take holiday

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What are the 2 financial statements of a sole trader?

-statement of P&L
-statement of FP
-produced annually at the financial year end
-don’t need to make annual returns to companies house

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What are sole trader responsible for to HMRC?

-annual income tax returns
-stating the profit of the business
-if registered for VAT = quarterly or annual VAT returns

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What are key characteristics of partnerships?

-all partners contribute capital
-profits are shared in accordance to agreement
-each partner is liable for debts of the WHOLE business
-decisions make take longer
-partners may specialise in particular areas
-loss of a partner may affect the running of the business

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What are the financial statements of a partnership?

-statement of P&L
-statement of FP
-don’t need to make annual returns to companies house

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What are partnerships responsible to HMRC for?

-if registered for VAT = quarterly or annual VAT return
-each partner is responsible to HMRC for their annual income tax returns (stating their share of profit in partnership)

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What is included in a partnership agreement?

-division of profits between partners
-partners salaries/commission
-whether interest it to be allowed on partners capital + the rate
-whether interest it to be charged on partners drawings + the rate

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What is goodwill?

-the difference between the value of a business as a whole, and the net value of its separate assets and liabilities

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How is an LLP set up?

-set up through legal incorporation
-requires certain documents to be sent to Registra of companies
-advisable to have a Members agreement
-must have 2 or more ‘designated members’

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What are the financial statements of an LLP?

-statement of P&L
-statement of FP
-supporting notes to financial statements
-auditors report

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What is the difference between an LLP and limited partnership?

-a limited partnership must appoint at least one general partner and one limited partner

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What is a general partner?

-has unlimited liability
-responsible for the day-to-day running of the business

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What is a limited partner?

-often formed for projects that will last for a short period of time
-predominately providing investment for the project in return for a share of the returns

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A company may become a PLC if it has:

more than £50,000 of issued share capital
at least 2 shareholders
at least 2 directors

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A company may be a Ltd if it has:

no minimum requirement for issued share capital
at least 1 shareholder
at least 1 director (can be the shareholder too)

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How do Ltd companies incorporate?

-by registering under the Companies Act 2006
-submit documents to Registrar of Companies

What must Ltd companies annual accounts comprise of?

-statement of P&L
-statement of FP
-supporting notes
-directors report
-auditors report

What are 5 advantages of incorporation?

liability for members and shareholders is limited to the amount they have invested
continue existence of the business as a separate legal entity
enhancement of credibility
easier access to finance
transfer of ownership may be easier

What are 3 disadvantages of incorporation?

1. more complex requirements of setting up + additional costs 2. info filed to companies house is public 3. business finances must be kept separate from those of the owners

What are public sectors?

-provide services to the UK -owned by the central and local government -funded by taxes

What are charities?

-set up to provide charitable activities within the scope of the charity -income from donations and funding

What are the main rules governing charities set out in?

-Charities Act 2011 -Charity Commission -Statement of Recommended Practice Accounting and Reporting by Charities or FRS 102

What rules must charities follow?

1. follow charity law 2. purpose must be for public benefit 3. governed by a trust deed 4. independent of other organisations 5. register with the Charity Commission

What is a trust deed?

-sets out the name of the charity, its objects and powers -deals with appointment of trustees -how meeting are to be run -required financial statements

What must charities financial statements comprise of?

-statement of financial activities -statement of FP -cashflow statement -supporting notes -trustees annual report -auditors report

What are common features of business organisations?

1. structure 2. common objectives and team working 3. co-operation 4. responsibility, authority and division of work

What is intangibility?

-a service doesn't provide a physical product

What is inseparability?

-a service cannot be separated from it's consumption by customer

What is perishability?

-any unused service cannot be stored for future use

What is variability?

-a service will be tailored to the needs of an individual customer

What are 4 funding sources?

1. borrowing 2. new capital 3. retained profit 4. working capital

What is new capital?

-can be introduced to a business by issuing further share capital -private = issued to shareholders or offered to a new investor -public = share issue on stock exchange

What is a disadvantage of new capital?

-it will dilute the ownership of existing shareholders

What is an advantage of new capital?

-won't have to repay interest -not required to repay the shareholders if they don't wish to invest in the business -shareholders will need to sell shares privately

What is retained profit?

-a business may wish to retain some of its profits to reinvest in the business -can be a less expensive way of investing in business growth

What is working capital?

-the difference between a business's current assets and current liabilities

What is a stakeholder?

-a person or organisation that has interest in another organisation

What will the customers be interested in?

-quality of products -reasonable price -statements showing how much they owe

What will suppliers be interested in?

-provide invoices and statements -expect to be paid on time

What are finance providers interested in?

-expect directors to show them the financial statements of the business before providing funds

What are owners/shareholders interested in?

-how much profit the business makes

What will employees be interested in?

-how well business is performing -expect reasonable training -

What is a stakeholders attitude to risk?

-the level of risk stakeholders are willing to to accept and what they will do if they feel that the level of risk is too high

What is risk averse?

-will accept a lower return or pay higher prices to avoid risk

What is risk seeking?

-actively seeking out riskier options to increase the likelihood of a higher return

What is a risk appetite?

-the level of risk they are prepared to accept to achieve their objectives

What is a risk tolerance?

-how much risk they are able to withstand

What is a risk threshold?

-the level up to which risk is acceptable