1. The Options for Start Up & Small Businesses

What do entrepreneurs need to consider when starting a business?

What kind of legal structure they want for their business

What is unlimitated liability?

When the owners are fully responsible for all debts owned by the busness. Owners are also legally responsible for any unlawful acts committed by those connect to the business

• No legal distinction between owners with this type of liability and the business → business owners may have to use their own personal assets to pay debts or legal fees

e.g. a sole business owner may need to sell their home to pay creditors if their business fails

What is limited liability?

When owners (shareholders) of private ltd companies and public ltd companies can only lose the original amount they invested in the business if it fails. Shareholders aren’t responsible for business debts and in most cases, the shareholders can’t be held responsible for unlawful acts committed by those connected with the business

• Companies are incorporated and owners are considered a separate legal entity to the business → if a company fails, the owners would lose their investment (shares), but wouldn’t have to use their assets to meet additional debts or legal fees

E.g. In 2018, A construction company, Carillion, entered liquidation and the shareholders lost their investment

Why might a business change its legal structure over time?

An entrepreneur may start as a sole trader but later change the business structure to gain more funding or provide limited liability, which offers more security for the owners.

What is a sole trader, and its advantages and disadvantages?

A business that has a single owner (although they may still hire employees)

✅Easy and inexpensive to set up

✅The owner has complete control over the business

✅All profits belong to the owner

✅Simple tax arrangements

❌Unlimited liability - the owner is personally responsible for any debts the business incurs

❌Limited access to finance and capital

❌Limited skill set of the owner/entrepreneur

What is a partnership, and its advantages and disadvantages?

Two or more people joining together to form a business e.g lawyers and accountants

✅Easy to set up and inexpensive

✅Shared responsibilities and decision-making

✅More skills and knowledge are available

✅Increased access to finance and capital

❌Unlimited liability

❌Potential of disputes between partners

❌Profits are often share equally, regardless of contribution

❌Difficult to transfer ownership

What is a private limited company (Ltd), and its advantages and disadvantages?

The ownership of the business is broken down into a specified number of shares. These shares can be sold by the owner, usually to friends and family or to venture capitalists. Decision-making often rests with the person appointed to run the company, often called the Managing Direction or CEO

✅Limitd liability - the owners aren’t personally responsible for the company’s debt

✅Access to greater finance and capital

✅Easier to transfer ownership

✅Can have a professional image and reputation

❌More expensive and time-consuming to set up

❌More complex legal requirements and regulations than sole traders

❌Annual finance reporting and auditing (inspecting) are required

❌Shareholders have little control over the company, as the founder usually imposes the agenda

What is franchising?

A business model where a franchisee buys the rights to operate a business using the branding, system, and support of a franchisor. In exchange, the franchisee pays an initial lump sum and ongoing royalties. The franchisor provides training, marketing, and ongoing assistance to help the franchisee run the business.

What are the advantages of owning a franchise?

• Centrallised advertising - A ready made, well recognised brand name which will be promoted centrally by the franchisor (e.g. Domino’s sponsored The simpsons for many years)

• Training - The franchisor provides training such as how to make pizzas properly, to ensure quality and consistency though the brand

• Supplies are provided - The franchisor provides equipment and supplies so that products will be the same, regardless of the location

• Exclusive location - The franchisor provides an exclusive area or market to sell to; they won’t create any more franchises in that area

• Suport services - Advice, training, use of software systems and problem solving are ongoing and the Franchisor may also provide the Franchisee with loans, insurance etc.

What are the disadvantages of owning a franchise?

• Overhead/Startup Cost - A fixed sum paid at the start of the franchise for the right to use the business name and resources

• Royalty costs - Usually paid quarterly and varies according to the level of sales. Often equal to 5-10% of sales turnover

• Cost of supplies - The franchisor may sell material or equipment to the franchisee at inflated prices

• Quality control management - If the franchisee doesn’t produce good/services to the required standard set by the franchisor, the franchise rights can be removed from them