Accounting: 2 Types of Business Organisation

What is a sole trader?

a business that is ^^__**owned and controlled by one person**__^^, although they may employ other people.

Name 4 advantages of being a sole trader.

● The owner ^^__**keeps all the profits.**__^^

● The owner is ^^__**his or her own boss**__^^, making all the decisions.

● It is ^^__**quicker and easier to set up**__^^ this type of business than a partnership or limited company.

● The sole trader’s ^^__**financial statements remain private**__^^ and do not have to be made available to the public.

Name 4 disadvantages of being a sole trader.

● The owner (plus what he or she can borrow) is the only source of capital.

● The owner ^^__**may experience long working hours and a heavy workload.**__^^
● The owner may lose money if sick or on holiday.
● The owner has ^^__**unlimited liability**__^^ – this means their personal ^^__**assets**__^^ are at risk if the business is unable to pay its debts.

What is a partnership?

a business that is ==__**jointly owned and controlled by more
than one person**__==. These people are called partners.

Name 5 advantages of a partnership.

● More than one source of capital (though not necessarily equal amounts).

● Shared workload

● Partners can specialise, allowing each to concentrate on what they do best.

● It is ^^__**quicker and cheaper to set up**__^^ than a limited company.

● The partnership’s financial statements remain private and do not have to be made available to the public.

Name 3 disadvantages of a partnership.

● Profits have to be shared between the partners (not necessarily equally).
● There can be disagreements between the partners.

● The owners still have unlimited liability – the partners are responsible
for paying any business debts, even if that means selling their own
personal assets.

What is it advised to do when setting up a partnership?

to write a deed of
partnership (also known as a partnership agreement).

a document that allows the partners to agree in advance how profits will be split, partners’ responsibilities and what happens if one partner wants to leave, etc.

What is a limited company?

a separate legal entity to the people who own it or
run it.

Who is a limited company owned by? and how many of these people can you have?

* shareholders, who provide the capital
* a minimum of two

Who runs a limited company and who appoints them?

Directors, appointed by shareholders

What documents must you fill out to set up a limited company?

Where must these be submitted?

* Memorandum of Association
* Articles of Association

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* Companies House

Name 2 advantages of a limited company.

● More capital can be raised by selling shares.

● shareholders have limited liability, which means less risk. The most they can lose is what they paid for their shares; they do not have to provide any more money to pay the company’s debts.

Name 5 disadvantages of a limited company.

● takes longer and is more expensive to set up a limited company than a sole trader or partnership.

● more paperwork and additional costs each year than a sole trader or partnership.

● profits have to be shared with the shareholders.

● original owners will lose control of the business if they own fewer than 50 per cent of the shares.

● Financial statements no longer confidential as anyone can obtain them from Companies House or, for a public limited company (plc), from the company’s website.

Which type of limited company can sell shares on the stock market?

A public limited company, private ones can’t

Can a business go from a sole trader/partnership to a plc?

No, it must become a ltd first.

Name 3 advantages of becoming a plc.

* Large amounts of capital raised by issuing shares through the stock market.
* capital raised through the
sale of shares can be used to
expand the business (instead of a
bank loan)
* Expansion leads to higher levels
of profits

Name 4 disadvantages of becoming a plc.

* Profits have to be shared with a
large number of shareholders
* Original owners probably lose
control as they own less than 50
per cent of the shares
* Higher annual costs and more
paperwork for auditing and
submitting the accounts
* Financial statements are freely
available on the company’s
website

What is owner’s capital?

* money introduced by the existing owner of the business, an internal source of finance.

Name 3 advantages of owner’s capital

* No interest or repayments
* No need to share profits with new
partner(s) or through dividends to
shareholders
* No loss of control of the business

Name 2 disadvantages of owner’s capital.

* may not be enough cash available from the current owner
* a slow way of financing
expansion, so you may miss out on
profits

What is partners’ capital?

money invested by new or existing partners.

Name 2 advantages of partners’ capital.

* No interest or repayments
* New partners can add expertise
and share the workload

Name 2 disadvantages of partners’ capital.

* Control of the business and profits
must be shared with any new
partners
* may not be possible to find new
partners able to contribute the
required capital

What is share capital?

money invested by shareholders, which makes them
owners of a limited company.

Name 4 advantages of shares.

* No interest or repayments due
* Dividends paid out on ordinary
shares will depend on what the
company can afford
* No security is needed
* Shares reduce the level of capital
gearing

Name 3 disadvantages of shares.

* Part of the profits will need to be
paid to the additional shareholders
* Loss of control if over 50 per cent
of the company is sold to ordinary
shareholders
* Large amounts paid in dividends
can damage cash flow

What is a debenture?

* long-term loans to a company from investors that may be secured on the assets of the company.

Name 3 advantages of debentures.

* No loss of control of the company (unlike shares)
* No repayments due for several years (unlike bank
loans)
* After the agreed date, no more interest or
repayments are needed (unlike shares)

Name 4 disadvantages of debentures.

* Interest is payable whether the company can afford it or not
* Large repayments in one lump sum can damage the
company’s cash flow at that time
* They increase the level of capital gearing
* They may require security

What is a bank loan?

* a fixed amount that must be repaid, together with interest, over a stated amount of time, usually in equal monthly installments.

Security must often be provided.

Name 3 advantages of a bank loan.

* No further repayments required
after a set period of time (unlike
dividends for shares)
* No loss of ownership of the
business (unlike shares)
* No large lump-sum repayments,
which is good for cash flow

Name 4 disadvantages of a bank loans.

* Interest is an additional cost to the business
* Repayments must be made whether
or not the business can afford them
* Increases the level of capital
gearing
* Usually needs security

What is a mortgage?

* a bank loan that is used to buy property and is secured on that property.

Name 3 advantages of a mortgage.

* No repayments due after a set period of time
(unlike dividends for shares)
* No loss of ownership of the business (unlike
shares)
* The monthly repayments are an affordable
way of buying or improving property

Name 4 disadvantages of a mortgage.

* Interest is an additional cost to the business
* The property is used as security, so it can be
repossessed if the business is unable to keep up
the repayments
* Increases the level of capital gearing
* The large initial deposit may cause cash flow
problems

What is a bank overdraft?

* the business’ bank account has a negative
balance.
* Interest is paid on the exact amount overdrawn, and security may be required.
* tends to be used only for short-term
borrowing.

3 advantages of a bank overdraft.

* It is flexible because the business only borrows
and pays interest on the amount it needs
* No loss of ownership of the business
* It is repaid when the business is able to do so

3 disadvantages of a bank overdraft.

* Interest is an additional cost to the business
* The rate of interest is often higher than on a

bank loan
* The overdraft facility can be cancelled by the

bank without notice