Business Ownership

Who is a sole trader?

A sole trader is a business that is owned and run by one person. Although a sole trader is owned by only one person, the owner can employ people to work for them.

How is a sole trader business financed?

Sole traders usually finance the business through the owner investing their own savings, money borrowed from friends or family, or a bank loan. There is a lot of financial risk in running a business as a sole trader due to unlimited liability.

What are the aims and objectives of sole traders?

The aims and objectives of sole traders will vary according to the type of business, but most sole traders will focus on increasing income and profit to allow the owner to make a living from their investment. Many sole trader businesses will aim to survive in the initial stages of setting up and during difficult economic times.

Typically, a sole trader business operates in what type of business environment?

Many sole traders operate in local business environment; often, their main aim is to provide a good product or service to the local community and provide customer satisfaction.

What are the advantages of setting up as a sole trader?

1. Decision-making is straightforward: the sole trader can make instant decisions without checking with someone else.

2. The sole trader is their own boss and does not need to follow the instructions of somebody else.

3. A sole trader business is easy to set up because there is no complicated paperwork to complete like you may find with other types of business.

4. Some sole traders may be able to operate the business to suit their lifestyle, such as choosing more flexible working hours.

5. Any profit is kept by the sole trader and does not need to be shared.

What are the disadvantages of setting up as a sole trader?

1. It can be difficult to raise the required capital as only one person is investing in the business. Banks are not keen to lend money to sole traders due to their high rate of failure.

2. A lack of the necessary skills and experience of owning a business can increase the risk of failure.

3. Fewer ideas are put into the business as there is only one owner. The sole trader doesn't have an opportunity to share ideas with any business partners. As a result, family and friends are often relied upon for advice.

4. The owner may need to work long hours as there may be no one to share the workload. Therefore, it may be difficult to take time off.

5. Unlimited liability is the main disadvantage of this type of business. This is because it can be very risky for the owner - a failing business could cost them their savings and their personal possessions.

What is a partnership?

A partnership is an agreement between two or more people to take joint responsibility for the running of a business and to share the profits and the risks.

What are the main features of a partnership?

• A business that is owned by between two and 20 people

• A business that is owned by more than one person

• A business with unlimited liability.

What is a deed of partnership?

The deed of partnership is a legal document that helps to ensure the business runs smoothly between all respective partners.

What does a deed of partnership outline?

• The names of all partners -How profits or losses will be shared amongst the partners

• How much money each partner invests

• Voting rights and the number of votes each partner has

• Arrangements for ending the partnership due to the leaving or death of a partner

• The details of each partner's duties and responsibilities - who does what?

What are the advantages of setting up a partnership?

1. Partnerships are cheap and easy to set up.

2. There is no complicated paperwork to complete to set up the business.

3. Extra capital is available as more than one person is investing into the business.

4. The workload is shared between the partners.

5. There is less stress for the owners as decisions and workload are shared.

6. Each owner will bring their own skills and ideas to the business, meaning that more expertise is available within the business. This allows a partner to specialise in particular areas of the business.

What are the disadvantages of setting up a partnership?

1. Profits must be shared among partners.

2. There may be disagreements between partners when making decisions or over workload.

3. Partners have to share the control and work as a team; they will not be their own boss.

4. Partners still have unlimited liability.

5. If a partner dies or becomes bankrupt, the partnership must come to an end.

What are the two types of limited companies?

1. Private limited companies

2. Public limited companies

What is a private limited company?

A private limited company (Ltds) is owned by shareholders that are approved by the other owners; they are sometimes family businesses.

What are the main aims of a private limited company?

The main aims of a private limited company will be to increase income and maximise its profit for the shareholders to receive a good return on their investment. Many private limited companies will also aim to achieve growth by expanding their business and opening more outlets, producing a wider range of products or employing more staff. Growth sometimes leads to the business 'going public' and becoming a public limited company.

What are the advantages of setting up as a private limited company?

1. The owners of private limited companies have limited liability.

2. Additional capital can be easily raised by selling more shares.

3. Private limited companies can keep trading even if a shareholder dies. This is because a shareholder's shares can be transferred to someone else.

4. A private limited company has its own legal status, separate from the shareholders, meaning it can sue and be sued. A private limited company can also own property.

5. Private limited companies are relatively cheap to set up in comparison with public limited companies.

6. Private limited companies cannot be taken over as shareholders must agree the sale of shares to others.

7. Private limited companies are usually run by the major shareholders and so there are relatively few arguments regarding the aims of the business.

What are the disadvantages of setting up as a private limited company?

1. Private limited companies are more expensive to set up than sole traders or partnerships.

2. A private limited company has to publish its accounts every year - these are available for the general public and competitors to see.

3. There is separation of ownership and control as directors are elected to run the business. This means that the owners no longer make all the decisions.

4. It may be difficult to raise additional finance as it can be hard to find suitable new shareholders, or banks may not be keen on lending money to smaller businesses.

What is a public limited company (Plcs) ?

This type of business is owned by members of the general public and other businesses who have invested their money into the company by buying shares on the stock exchange.

What are the advantages of setting up as a public limited company?

1. Similar to private limited companies, public limited companies have limited liability. This means that shareholders' personal assets are protected and they only risk losing the money they have invested in the business in the form of shares.

2. Additional capital can be easily raised by a public limited company; more shares can be sold as there is no upper limit to the number of shareholders. This makes it easier to grow and expand.

3. Public limited companies are usually well-known organisations with a good reputation which makes it easier for them to raise finance. Banks are more willing to lend to large, established companies.

4. A public limited company can keep trading even if a shareholder dies. This is because a shareholder's shares can be transferred to someone else.

5. A public limited company has its own legal status, separate from the shareholders, meaning it can sue and be sued. A public limited company can also own property.

6. A public limited company can take advantage of its size to benefit from economies of scale.

What are the disadvantages of setting up as a public limited company?

1. It is expensive to set up a plc: at least £50,000 of share capital must be available and legal paperwork needs to be produced.

2. A public limited company has to publish its accounts every year - these are available for the general public and competitors to see.

3. Unwanted takeovers are possible as shares can be bought by anyone; the shareholder who owns more than half the shares controls the business.

4. There is separation of ownership and control as directors are elected to run the business. This means that the owners no longer make all the decisions.

What are social enterprises?

An organisation that applies business strategies in an attempt to bring about improvements in human and environmental well-being.

Co-operatives are an example of a social enterprise. What are co-operatives?

A co-op is a business organisation that is owned by its customers, workers, producers and members who have a common purpose or aim. They have an equal say in the running of the business and receive a share of any profits the business makes. The share they receive is called a dividend.

What is a consumer co-operative?

A consumer co-operative is where a group of local consumers get together for mutual benefit.

What is a worker co-operative?

A worker co-operative is a business that is owned and controlled by the whole workforce. People who work within the business are in control rather than outside shareholders. It is the most democratic type of business as everybody plays a part in the decision-making process.

What are the advantages of co-operatives?

1. The members feel that they have a real impact in the running of the business.

2. Co-operatives often focus less on profit which leads to better customer service and an emphasis on ethical business practices.

3. Profits are distributed fairly among the members. Members enjoy working together and get great job satisfaction from working for themselves and their colleagues. They are therefore more likely to be motivated to succeed.

4. There is less likelihood of arguments as members share the same aims and objectives.

5. Members are more likely to be aware of their responsibilities to the local and larger communities. Co-operatives are committed to the training and education of their employees.

6. The initial investment required in buying shares and becoming a member is less than other ways of starting a business (sometimes just a pound).

What are the disadvantages of co-operatives?

1. Decision making can be difficult and may take a long time as everybody has a say in the running of the business.

2. All members have an equal right to speak and contribute to the decision-making process - even if they have little knowledge of the subject being discussed.

3. It may be hard for members to make tough decisions that will affect their co- workers, such as job cuts.

4. A co-operative's focus on fairness and ethical business practice may limit opportunities for growth and maximising profit.

5. Workers in a co-operative may find internal promotion or career moves difficult.

6. Co-operatives may find it difficult to recruit top quality management as the most able candidates usually demand a very high salary.

What are charities?

Charities are non-profit organisations that aim to raise money to support a cause.

How are charities funded?

A charitable organisation is a type of non-profit organisation. Their main income is from donations, though they will also raise money through holding events, providing services and selling products.

What is unlimited liability?

Unlimited liability is when the owners of a business have a legal obligation to settle their business' debts. Personal belongings may have to be given up in order to pay the debts.

What types of businesses have unlimited liability?

Sole traders and partnerships

What happens to businesses with unlimited liability if they fall into debt?

There is no distinction between the assets and debts of the business and the personal assets and debts of the owner. If the business can't repay its loans or gets sued, the owner is responsible. If the business' assets aren't enough to cover the debt or damages, then the owner will have to pay the rest of the debts from personal bank accounts, investments, their car or even their home.

What is limited liability?

Limited liability is a form of legal protection for shareholders and owners that prevents individuals from being held personally responsible for their businesses' debts or financial losses.

What types of businesses have limited liability?

Private and public limited companies

What happens to businesses with limited liability if they fall into debt?

If the company goes out of business and subsequently leaves debts, the owners will only lose the money that they have put into the company (the value of their shares/investment). The owners will not be forced to sell their own personal possessions, such as a house, to pay the company's debts.