Business (Options for startups and Small businesses)

Define Limited Liability

The level of risk is limited to the amount of money that has been invested in the business or promised as an investment.

Limited liability only applies to certain types of business such as private limited companies.

A Limited Liability is known as an INCORPORATED.

Unlimited liability

The level of risk goes beyond the amount invested, so the personal assets of the business owner can be used to pay off the business’s debts

Unlimited Liability is known as UNINCORPORATED

Incorporated

 A business that is registered as a company, so the business and the owners are separate in the eyes of the law

Unincorporated

A business that is not registered as a company, so the owners and the business are the same body in the eyes of the law

Sole Trader (1st type of ownership)

A type of unincorporated business that is owned by just one person

Partnership ( 2nd type of ownership)

A business that is owned by a group of two or more people who share the financial risk, the decision-making and the profits

Private limited company

An incorporated business that is owned by shareholders

How the sole trader business works?

A sole trader is an unincorporated business and hence has unlimited liability

There is only one owner, but they may have employees who work for them.

• Often seen as the easiest way of setting up a business as there are no legal requirements

The businesses financial information is not published but the sole trader must declare their earnings to HMRC (Her Majesty’s revenue and customs)

Best for: Small, low-risk businesses (e.g. freelancers, small shops

Preferable if: You want full control, are just starting out alone, and don’t need much investment

Sole Trader advantage and disadvantage

Advantages of sole trading

• Quick and easy to set up

• The sole trader keeps all profit

• Financial info kept private

• Low setup costs

Disadvantages of sole trading

• Risk of unlimited liability

• Puts a lot of pressure on one person (long work hours)

• owner performs many different roles in the business

• Challenging to raise enough money to establish and grow business.

How Partnerships work?

Partnership was orginally unlimited liability, but now it is possible to set up a limited liability partnership.

Partnerships is set up using a DEED OF PARTNERSHIP. This is a legal document that outlines who the partners are?, the amount invested by each partner, how profits will be shared, the voting rights and actions to take if one partner decides to leave the partnership.

Best for: Businesses with 2–20 people who trust each other and want to share control

Preferable if: If you want to split responsibilities and startup costs.

Advantages and disadvantages of partnerships

Advantages of partnership

•  Business owners may have wider expertise and can share ideas and decision making

• The risk is shared and  responsibility for debt by the owners(the Limited Liability Partnerships Act 2000)

• Easier to raise funds than a sole trader to grow business

• The financial information is kept private.

Disadvantages of partnership

• Decisions made by one partner can affect all partners

• If a partner leaves the business no longer exists

• Profits are shared

• Conflicts can arise between partners and involve long work hours.

• risk of unlimited liability if one partner let the other down by not upholding their responsibilities in the business

How Private Limited Companies work?

• An incorporated business owned by shareholders (incorporated so limited liability) 

• To set up a private limited company it must be registered at companies house, which is part of the UK government. —> This involves submitting Two documents:- MOA (Memorandum of Association) and AOA (Articles of Association )

Best for: Businesses that want to grow, protect owners’ personal assets, or raise investment

Preferable if: You’re planning to grow fast, take on investment, or want to protect your personal finances.

what does each document in private limited company suggest? why is it used?

• The MOA gives details such as the name of the company, its trading activities, its registered office and the amount to be invested in the share.

• Whereas the AOA gives details about the voting rights of the shareholders, how profits will be distributed and running of the annual general meeting (AGM)

• Shareholders are invited to vote on important decisions in the AGM.

• The number of votes held by each shareholder is determined by the number of shares they hold.

Advantages and Disadvantages of Private limited company

• Advantages of private limited company

• Owners have limited liability

• The term “LTD” after business name may make it appear to be a bigger or more established business

• Easier to raise finance to establish business

• The business will continue to trade even if shareholders change

• Gives Individuals the opportunity to be their own boss,

•  Disadvantages of private limited company

• More complex to set up than soletraders and partnership + more paperwork

• There are chances of disagreement between shareholders + very time consuming to set up

• The business financial information is published

• More requirements to report information to organisations like HMRC and business may require outside professionalism to help manage finances

Define Shareholders

• An incorporated business owned by shareholdersinvestors who are part owners of the company, they invest in the business in return for a share of the profits and voting rights at AGM.

Franchise

when one business gives another business permission to trade using its name and products in return for a fee and share of its profits. This is the basic word that describes what happens between a franchisor and franchisee.

Franchisor

An established business(like Mc donalds) that gives permission to an entrepreneur to trade using its name and products

Franchisee

an entrepreneur who pays a fee to trade using the name and products of an established business

Advantages and Disadvantages of running a franchise operation

Advantages of Franchising

• Lower risk than setting up independently, as the business model is already successful (since the brand is popular/successful its easier to attract customers and hence increased revenue/sales 

• the franchisee gets access to free training and marketing

•  easier to make money

• Disadvantages of Franchising

• Franchisees has to pay an initial fee as well as an ongoing fee/ share of profits. This is known as royalities (In return, it gets to join the franchise and benefit from using its name, products/ equipments etc)

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• Franchisee cannot make independent decisions (The franchisor makes key decisions like choosing suppliers/ setting prices/goods or services offered.

• Brand reputation can be damaged by other franchisees if they do not maintain standards

• expensive to set up