Booklet 3: Forms of Business Ownership

Question 1

What is a sole trader?

Answer 1

A sole trader is a business entity that is owned and controlled by one individual.

Question 2

Advantages of a sole trader.

Answer 2

1. Low start-up costs
2. Get all the profits
3. Finances are private
4. Complete control (own boss)

Question 3

Disadvantages of a sole trader.

Answer 3

1. Unlimited liability
2. Work long hours
3. Difficult to raise capital (banks not keen to lend)
4. Opportunities to gain from economies of scale are limited.

Question 4

What is a partnership?

Answer 4

A partnership is when two or more partners share ownership of a business.

Question 5

Advantages of a partnership.

Answer 5

1. Each partner can specialise/ shared workload.
2. They share any losses
3. A partnership can raise capital more easily
4. Finances are private.

Question 6

Disadvantages of a partnership.

Answer 6

1. Unlimited liability
2. Profits have to be shared.
3. Decision-making can be slower due to more people to consult with.
4. Partner conflict.

Question 7

What is a limited company?

Answer 7

A limited company is a business that operates as a separate legal entity from its owners (shareholders). The company is managed by the directors who may also be shareholders.
Two types- Public (Plc) and Private (Ltd).

Question 8

Advantages of a Private Limited Company (Ltd)?

Answer 8

1. Limited liability
2. Raising capital (sale of shares)
3. Continuity
4. Control (unable to sell shares to the public)
5. Specialisation (each director has a specific set of skills)

Question 9

Disadvantages of a Private Limited Company (Ltd)?

Answer 9

1. Lack of privacy
2. Setup costs
3. Taxation (corporate tax)
4. Restrictions on raising capital (cannot sell shares to the public).

Question 10

Advantages of a Public Limited Company (Plc)?

Answer 10

1. Limited liability
2. Can take advantage of economies of scale.
3. Continuity
4. Raising capital (sale of shares).

Question 11

Disadvantages of a Public Limited Company (Plc)?

Answer 11

1. Financial statements are public.
2. Setup costs (requires the business to have 50,000 pounds in the bank).
3. Threat of takeover (rival can buy your companies shares)

Question 12

Advantages for a franchisee? (is the person buying into the business)

Answer 12

1. Defined territory (No other franchise will be in your local area).
2. Well-known brand
3. Marketing (benefit from large ad campaigns).
4. Access to finance (banks see franchises as low risk).
5. Less risk (loyal customers to an established product portfolio).

Question 13

Disadvantages for a franchisee? (is the person buying into the business)

Answer 13

1. Fees to the franchisor (initial and royalty fees).
2. Loss of control (strict guidelines & loss of almost all decision-making power).
3. Interdependency (negative actions of one franchise impact others).

Question 14

Advantages for a franchisor? (is the business- e.g. McDonald’s)

Answer 14

1. Growth opportunities
2. Profits (upfront payments + Royalties).
3. Administration (minimal is as each franchisee is liable for their own business).

Question 15

Disadvantages for a franchisor? (is the business- e.g. McDonald’s)

Answer 15

1. Loss of control (No say in the day to day operations).

2. Diseconomies of scale (become more difficult to co-ordinate, control and motivate staff).

Question 16

What is a social enterprise? (e.g. Credit Unions)

Answer 16

A social enterprise is a business with the following:

1. Primarily social objectives.
2. Profits are re-invested in the business or the community.
3. Not driven by the need to maximise profits for shareholders/ owners.

Question 17

Advantages of a social enterprise?

Answer 17

1. Profits/ donations/ revenue for change.
2. Better corporate image.
3. Increased employee motivation.
4. Less Risk (not constantly pursuing profits)

Question 18

Disadvantages of a social enterprise?

Answer 18

1. Dependency on funds.
2. Training costs
3. Little Profits (for the owner)
4. Raising finance.

Question 19

Advantages of a Charity?

Answer 19

1. Charity Work
2. Consumers benefit from a wider range of products through the selling of second-hand goods.
3. More affordable.
4. Lower costs (having voluntary work and not having to pay rates, recieve donations).

Question 20

Disadvantages of a Charity?

Answer 20

1. Dependency on funds.
2. Greater risk (some consumers perceive the quality of second-hand goods to be inferior).
3. Lack of privacy.
4. Expenses (expensive salaries to pay for executives and travel expenses also have to be paid for volunteers.