1.4 Types of business organisation

Question 1

Define sole trader

Answer 1

an individual who may or may not employ other people, but who owns and operates a business

Question 2

5 Advantages of being a sole trader

Answer 2

• easy to set up
• can often be set up with little capital
• own boss -> full control over the business
• profit doesn’t have to be shared
• personal contact with customers -> increase customer loyalty

Question 3

5 Disadvantages of being a sole trader

Answer 3

• full responsibility: work long hours
• unlimited liability
• often lack all the skills that are needed
• often lack capital to buy new equipment or to expand
• may lose profits if the owner is sick/ on holiday

Question 4

Define unlimited liability

Answer 4

owner has a legal obligation to pay any losses made by the business

Question 5

Define partnership

Answer 5

a business association between two or more owners of an enterprise, usually between 2-20 members.

Question 6

5 Advantages of partnership

Answer 6

• relatively easy to set up
• capital from partners, so more capital available
• bring new skills & ideas into the business
• affairs can be kept private
• risks and responsibilities spread among partners

Question 7

5 disadvantages of partnership

Answer 7

• unlimited liability
• slow decision making process
• limitation of number of partners
• problems can arise if partners are lazy
• if partnership was set up by legal agreement, it will need to be re-formed if one partner dies

Question 8

Deed of parnership

Answer 8

• how much profit & losses are to be shared
• how much money each parter has put into the business
• how much each partner gets paid
• working arrangements of the partnership
• arrangements for adding/ removing a partner
• arrangements for ending the partnership

Question 9

Define private limited companies (LTD)

Answer 9

• owned by shareholders
• run by directors
• limited liability

Question 10

4 Advantages of LTD

Answer 10

• shares issued to raise money
• shares not to general public- family and friends
• limited liability
• small number of directors

Question 11

5 Disadvantages of LTD

Answer 11

• financial information available to public
• shares can be sold at any time by shareholders
• shareholders might not have money to help expand
• share of profit to shareholders
• information to Registrar of companies, time consuming and expensive

Question 12

Define public limited companies (PLC)

Answer 12

a company that is able to offer its shares to the public

Question 13

Requirements of a PLC

Answer 13

• minimum # of shareholders=2
• accounts must be filed within 6 months of the year end (9 months for LTD)
• company secretary must be a qualified person (not the case for LTD)
• minimum # of directors =2 (1 for LTD)

Question 14

4 Advantages of PLC

Answer 14

• limited liability
• easily borrow money to expand
• raise money by selling shares
• shareholders have little say unless they own lots of shares

Question 15

4 Disadvantages of PLC

Answer 15

• complicated & expensive to set up
• general public can view accounts
• shareholders get dividends
• easily taken-over by buying on stock exchange

Question 16

Process of setting up a LTD/ PLC

Answer 16

1. owners of a business -> ‘companies house’ to get approval
   - hand in the articles of association (rules + policies of the business)
   - hand in memorandum of association (sets out what the company has been formed to do)
2. if they are happy, they will give you certificate of incorporation

Question 17

Define franchising

Answer 17

The franchisor grants a licence to a franchisee to produce a product, sell products/ provide services in a given area. It is a marketing arrangement allowing another business to trade in the same style as an existing business

Question 18

Define royalty

Answer 18

a payment made to the franchisor based on the sales turnover of the franchise

Question 19

Advantages of franchising

Answer 19

• gets support from franchisor, less risk

Question 20

Disadvantages of franchising

Answer 20

• have to pay to the franchisor

Question 21

define joint ventures

Answer 21

two independent businesses set up a new enterprise in which they jointly own a stake (form of a partnership)

Question 22

types of organisation with limited liability

Answer 22

LTD and PLC

Question 23

define public corporation

Answer 23

businesses owned by governments, however, considerable amount of freedom

Question 24

purpose of public corporations

Answer 24

• make sure that important activities that affect the whole nation are carried out well
• to preserve jobs

Question 25

define nationalisation

Answer 25

when a business/industry is taken over by the government

Question 26

define privatisation

Answer 26

selling a public corporation to shareholders

Question 27

Disadvantages of public corporations

Answer 27

• become too large & difficult to manage

- lack of competition can lead to higher prices & wasteful use of resources