Unit 1.4 - understanding business activity Flashcards
(12 cards)
State & explain 2 types of unincorporated businesses + pros & cons
- Sole trader - businesses owned & operated by one person.
+ easy to set up, owner has complete control over business, owner keeps all profit
- unlimited liability, owner likely has limited sources of capital, owner takes on all of the workload - Partnership - business owned & operated by 2+ people.
+ business has access to more capital, owners have different expertise which can help them make better decisions, workload can be split
- unlimited liability, conflict between business partners can make decision-making more difficult, profit is shared
What does unlimited liability mean?
The owner(s) of the business is responsible for all debts of the business. If business fails/has outstanding loans, the owner may need to give up their personal assets to pay for them, making it a high risk scenario.
State & explain 2 types of incorporated businesses
- Private limited company - businesses that break up their ownership into shares and sell them to friends and family in order to raise finance. Much smaller than public limited companies which means the owner can retain control of business
- Public limited company - businesses that break up their ownership into shares and sell them to the public through the use of stock exchange to raise finance. They cannot refuse to sell shares. Therefore, they are much larger than private limited companies but the owners (shareholders) have little control over decisions made by managers because there are so many of them. Managers (employees at company) consult shareholders once a year at AGM.
Both are required to have a board of directors.
What are the pros & cons of incorporated businesses?
+ limited liability, large amount of capital can be raised by selling shares, business can continue operating without original owner, easier to get bank loans
- owners lose some control of business for each additional shareholder they bring on board, company has to be registered which raises costs and is time-consuming, conflicts are likely to occur
What is limited liability?
The shareholder’s liability for the debt is limited because the debt belongs to the company; if business fails, shareholders only lose money they invested in shares, but their personal assets are safe and cannot be taken to pay for the debt
What is a franchise?
A form of agreement where a business owner (franchisor) sells the right to supply their goods and services under their recognized brand name, to the franchisee. The franchisor is usually a successful company that wishes to expand, so they find partners (franchisees) who want to open, own & run shops that sell this company’s products. In exchange, these partners pay upfront fees and royalties to the franchisor. E.g. McDonald’s
Pros & cons for franchisors
+ cheaper form of expansion than opening additional premises, business receives additional finance from franchisee’s investment, can enter new market easily due to franchisee’s local knowledge.
- may lose touch with customers when it expands, leading them to lose interest; franchisee may not manage brand well & damage brand name; may grow too quickly & cause customers to feel dissatisfied
Pros & cons for franchisee
+ can gain help & support from established franchisor; cheaper alternative than starting new business; managing business is simpler because franchisor already has the supply chains
- little opportunity to be creative/innovative; franchisor makes all major decisions; royalties have to be paid to the franchisor, so they don’t keep all the profit
What are joint ventures?
When two businesses work together to complete a project, but they do not integrate/join together to become a larger business; instead, they form another business to complete the project. It allows both businesses to keep operating separately and to increase their market share (if in same industry). It is often done when businesses wish to expand internationally (they gain access to detailed market knowledge).
Pros & cons of joint venture
+ costs are shared between 2 businesses; business gains access to local knowledge of different markets; lower risk when expanding
- profits are shared between businesses; conflicts could occur due to different approaches; bad decision by one business can damage brand image of another
What are public corporations?
Businesses owned & operated by the government. They are non-profit and funded by taxes. They provide specific services to benefit society (without which it may not be able to function). E.g. police, street lighting, museums
Factors affecting ownership (which type of business model should be chosen)
- Level of control
- Amount of finance needed
- Amount of risk (liability) involved
- Growth plans of business - slow/fast
