Types of Business Organizations Flashcards
(30 cards)
Sole Trader/Sole Proprietorship
A business organization owned and controlled by one person.
Advantages of sole trader
ADVANTAGES:
- Easy to set up
- Full control
- Sole trader receives all profit
- Few legal regulations
- Flexibility
- Secrecy
Disadvantages of sole trader
DISADVANTAGES:
- Unlimited liability : owners held responsible for debts of company
- unincorporated: business has same identity as the owner
- Full responsibility
- Lack of capital
- Lack of continuity
Partnership
A partnership is a legal agreement between two or more (usually, up to twenty)people to own, finance and run a business jointly
Advantages of partnership
- easy to set up
- More capital
- Responsibilities shared
- Motivation
- Shared losses
Disadvantages of partnership
- Unlimited liability
- Unincorporated business (no separate legal identity)
- Risk of disagreement
- Limited number of partners
- Dishonesty/ inefficiency
Contents of Partnership Agreement:
Amount of capital invested by all partners
Tasks to be done by each partner
The way profits are shared out
How long partnership will last
Arrangements for absence, retirement and how partners could be let known
Dividend
Dividend is the amount of profit each shareholder gets. They are the returns to shareholders for investing in the company
LTD
Private limited companies are businesses owned by at least 2 shareholders but they cannot sell shares to the public. Shares are sold privately to friends and family
Article of Association
(def and contents)
Article of Association – must contain the RULES in which the company will be managed. Contains:
Rules for shareholder meetings
List of directors and their jobs
Voting rights of shareholders
Details of how accounts are recorded
Memorandum of Association
(def and contents)
Memorandum of Association – must contain important information about the company:
Company name, address
What the business does
Number of shares to be sold
Advantages of LTD
- continuity of existence
- Shares generate more capital
- Limited liability
- Incorporated company
- Control isn’t easy to lose
Disadvantages of LTD
- hard to set up: Many legal matters
- Shares cannot be sold without the a greement of all shareholders
- Less secrecy
- Shares cannot be sold to general public
PLC
Minimum value of shares must be sold [50,000 pounds]
Accounts must be made public
Advantages of PLC
- limited liability
- Incorporated business
- Much capital available
- No limit to number of shareholders
- No restrictions on selling of shares
Disadvantages of PLC
- Legal formalities
- Difficult to control and manage
- Expensive to sell shares
- Loss of control possible
Joint venture
Joint venture is an agreement between two or more businesses to work together on a project.
Advantages of joint venture
- Costs are shared, good for expensive projects
- Shared knowledge of two businesses
- Risks are shared
Disadvantages of joint venture
- Profits have to be shared if project is successful
- Might have disagreements over important decisions
- Different methods of running business
Franchise
A franchise is a business based upon the use of the brand names, promotional logos and trading methods of an existing successful business. The franchisee buys the license to operate this business from the franchisor
ADV & DISADV to Franchisor
TO FRANCHISOR
Advantages:
- Rapid, low cost method of business expansion
Gets and income from franchisee in the form of franchise fees and royalties
- Franchisee will better understand the local tastes and so can advertise and sell appropriately
- Can access ideas and suggestions from franchisee
- Franchisee will run the operations
Disadvantages:
- Profits from the franchise needs to be shared with the franchisee
- Loss of control over running of business
- If one franchise fails, it can affect the reputation of the entire brand
- Franchisee may not be as skilled
- Need to supply raw material/product and provide support and training
ADV & DISADV to Franchisee
Advantages:
- An established brand and trademark, so chance of business failing is low
- Franchisor will give technical and managerial support
- Franchisor will supply the raw materials/products
Disadvantages:
- Cost of setting up business
- No full control over business- need to strictly follow franchisor’s standards and rules
- Profits have to be shared with franchisor
- Need to pay franchisor franchise fees and royalties
- Need to advertise and promote the business in the region themselves
RISK
Risk - the uncertainty of profits or danger of loss, events that could cause business to fail
OWNERSHIP
Ownership – who owns the business (partnership = partners, LTDs and PLCs = the shareholders)
