Forms Of Business Ownership Flashcards
(47 cards)
Definition of sole trader
A business organisation that has a single owner causing no legal distinction between the owner and the business. They receive all profits except taxation specific to the business and has unlimited liability meaning they are held personally responsible for the debts of the business
Definition of partnership
A business relationship of two or more entities conducting business for mutual benefit. They manage the business and are equally liable for its debts; other individuals in the business are limited partners who may invest but arent directly involved in the management and are liable only to the extent of their investments. In a partnership each partner shares equal responsibility for the company’s profits and losses as well as its debts and liabilities.
What is a deed of partnership
A binding legal document which states the formal rights of partners in the business
What is a silent/sleeping partner
A partner that contributes capital and shares in profits/losses but doesnt participate in decision making
Definition of limited partnership
A partnership which has at least one ordinary partner who has unlimited liability and a limited parented that contributes capital, shares in profit but has limited liability. A limited partner can’t participate in decision making
Definition of a limited company
A business organisation which has a separate legal entity from those of its owners. The liability of the members or subscribers of the company is limited to what they have invested or guaranteed in the company.
Definition of shareholders
Investors who have bought a share into the company
Definition of limited liability
Each shareholder is only liable for the original amount of money invested in the business
Definition of a franchise
An agreement between two parties which gives one party (the franchisee) the rights to market a product or service using the trademark of another business (the franchiser)
Definition of a social enterprise
A business venture established to address a social issue within a cormmunitity or to improve the quality of life for citizens or the environment. All profit made is reinvested to help achieve the social objective of the business.
Definition of a stakeholder group
A specific group of people who have a genuine interest in the activities of a particular business and who will be effected by the activities of the business.
What is a private sector organisation
These are organisations owned, financed and run by private individuals. These organisation can run from sole traders to multinational businesses although they aim to make a profit they’re can be non-profit organisations such as charities and mutual societies for example Tesco is private.
what are public sector organisations.
These can also be known as state-owned organisations that are owned and operated by the government and mainly provide essential services such as education, healthcare and policing for example, the NHS and the PSNI. Their main aim is to provide public services that would be difficult for individuals to provide themselves or can’t afford they rely on finance from taxation.
What are unincorporated businesses
This is where there is no distinction in law between the individual owner and the business causing their identity to be the same for example, sole traders and partnerships.
Tescos would be a incorporated business whereas Robinson would be an unincorporated business
What are incorporated businesses
This is where legal identity is seepage from the individual owners and as a result can own their own assets and owe money and enter into contracts on their own right. For example private limited companies and public limited companies.
Both incorporated and unincorporated businesses are within the private sector. At the start of 2013 there was 4.9 million private sector businesses in the Uk.
Overview of a sole trader
They usually have very little capital for expansion and heavily reliant on the owners personally commitment to make the business success due to unlimited liability. These businesses tend to be hairdressers or newsagents.
What are the advantages of being a sole trader
Low start up costs- they usually start off relatively inexpensive and with few legal processes allowing them to start the business selling immediately. They have little bureaucracy and rarely have to report back to the government as them and the business are seen as the same entity allowing them to set up quickly which is beneficial for seasonal businesses
Profits- All profit earned by the sole trader are wholly owned by the sole trader as there is no other entity to share the business with also allowing them to have full control over business decisions.
Finances are private- As by law they dont have to pay corporation tax and only income tax meaning they have to earn a certain amount of profit before they start paying allowing them to make profit quicker as well as not having to legally publish their financial statements.
Flexibility- they face the least government regulations and are better equipped to adapt to shifts in the economic conditions.
What are the disadvantages of being a sole trader
Unlimited liability- They have unlimited liability meaning they are solely responsible for businesses debts. If they become bankrupt the individual is responsible for this. No divorce between person and organisation.
Raising capital- most sole traders have difficulty raising capital as there is fewer people to invest into the business as banks are reluctant to lend money to individuals who have no credit rating and a high probability of insolvency causing this to limit their market share and growth.
Work long hours- as they are solely responsible they often have to work long hours to ensure the business is successful to due unlimited liability. If they are sick they have no one to look after the business
Lack of expertise- sole traders often have a few basic skills but for a business to run they need a range of skills which is better obtained through multiple partners which can lead to failure.
Competition- they often charge higher prices to make profit but they are often unable to take advantages of discounted materials or economies of scale as they have little capital to start.
Overview of partnerships.
This is where two or more partners share ownership and decision making. Examples of partnerships may include law or accountancy firms.
They sign a partnership agreement or partnership deed to provide written evidence of their terms that usually include the capital each person must invest, salaries and percentage share of profits among partners. If this agreement doesn’t exist then the partnership act 1890 applies stating that all profits and losses are divided equally.
What are the three main partnership types
- Ordinary partnership- where each partner has unlimited liability and an agreement setting out responsibilities and profit. This allows more capital to be used in a businesses compared to a sole trader
- A limited partnership- where atleast one partner has unlimited liability allowing atleast another partner to contribute finances receiving a dividend with limited liability but has no involvement in the running of the business (a sleeping partner)
- a limited liability partnership (LLP)- These are designed for trading partnerships allowing each person who are actively involved in the business to limit their liability with atleast two partners having additional legal responsibilities and must register with companies house.
What are the advantages of a partnership
Low start up costs- they are often inexpensive and simple to start up allowing them to have faster entry to market as they can launch their business quicker allowing them to be more agile in responding to market opportunities. These lower costs may attract more partners who have better skills.
Profits- they are divided equally among the number of partners in a business unless stated otherwise. There is less need to repay loans or investors as the partners invest into the company itself making it easier to profit-share
Expertise- as there is more people making decisions there is a wider range of skills allowing certain partners to specialise in certain aspects of the business
Shared Workload- compared to sole traders they can share equally the work and can cover for absent partners meaning their workload isn’t disturbed allowing them to continue if a person is sick.
Raising capital- they often can easier get loans from banks compared to sole traders but the partners are also able to invest more as there are people people to contribute allowing them to focus on creating value for the business attracting more customers as they arent distracted repaying larger loans.
Finances are private- they arent legally required to publish financial statements for external scrutiny
Effective decision making- each partner can contribute to problem solving allowing them to focus better on business and making a profit than decisions that may take a while
What are the disadvantages of a partnership
Unlimited liability- they are personally responsible for debts which can discourage potential partners from taking risks in a business and can complicate the business is a person leaves or dies causing them responsible for their share of the debts and liabilities as well as being complex for partners to organise.
Loss of autonomy- they must consult each other on decisions since they each take part in the business and can take time due to a risk of a deadlock and can relate to dependency on others and partner conflict.
Lack of capital- they can also find it difficult to raise loans from banks compared to public limited companies
Lack of continuity- they often resolve over trust or personal issues such as a lack of control
What is a limited company
This is a business that operates as a separate legal entity from its owners (shareholders). It is managed by directors who may also be shareholders but don’t have to be. It is formed through submission of 2 documents to the Register of companies at the companies house.
What is the companies house
This is an organisation responsible for forming, monitoring and winding up limited companies in the Uk. All limited companies must submit annual financial statements and reports to this house.