Business SUBUNIT 1.4

What is a sole trader?

A business owned and controlled by one person. The owner has unlimited liability and keeps all profits after tax.

What are the key characteristics of a sole trader?

Single owner, unlimited liability, keeps all profits, own decision-making, simple to set up, no separate legal identity, unincorporated.

Give 5 examples of sole traders.

Local newsagent, plumber, electrician, freelance graphic designer, independent hairdresser, corner shop owner, self-employed photographer, gardener/landscaper, private tutor, dog walker.

List 5 advantages of being a sole trader.

Easy to set up, owner keeps all profits, full control, personal service, flexibility, privacy, low costs.

List 5 disadvantages of being a sole trader.

Unlimited liability, limited capital, unlimited hours, lack of continuity, limited specialist skills, burden of responsibility, harder to attract employees.

What is unlimited liability?

The owner is personally responsible for all business debts. Personal assets (house, car, savings) can be taken to pay business debts.

What is the biggest disadvantage of being a sole trader?

Unlimited liability

Why is capital limited for a sole trader?

Only the owner can provide finance (or borrow personally), difficult to raise large amounts, banks may be reluctant to lend to sole traders.

What common mistake do students make about sole traders and liability?

Thinking sole traders have limited liability. They have UNLIMITED liability

What common mistake do students make about sole traders and profits?

Forgetting that sole traders keep ALL profits (not just some).

What is a partnership?

A business owned and controlled by two or more people (usually between 2 and 20 partners). Partners share the profits, risks, and decision-making. Partners have unlimited liability unless they form an LLP.

What is a partnership agreement?

A legal document that sets out the rules for running the partnership, including capital contributions, profit sharing, roles and responsibilities, dispute resolution, and what happens if a partner leaves or dies.

What are the two types of partners?

General partners (take part in running the business, have unlimited liability, make decisions) and sleeping partners/limited partners (invest capital but do not take part in running the business, have limited liability in LLPs, share profits but do not make decisions).

Give 5 examples of partnerships.

Accountancy firms, law firms, dental practices, medical practices, architectural practices, small retail businesses run by family members.

List 5 advantages of partnerships.

More capital, shared decision-making, shared risk, specialist skills, continuity, privacy.

List 5 disadvantages of partnerships.

Unlimited liability, disputes between partners, limited capital, lack of continuity, partnership agreement required, risk of one partner's mistakes affecting all.

What is joint and several liability in a partnership?

Each partner can be held responsible for ALL debts of the partnership, not just their share. A partner can be liable for the actions of all other partners.

What common mistake do students make about partnerships and liability?

Thinking all partners have limited liability. In general partnerships, partners have UNLIMITED liability. Only LLPs offer limited liability.

What common mistake do students make about partnerships and legal identity?

Forgetting that partnerships are not separate legal entities.

What is a private limited company (Ltd)?

A business owned by shareholders who have limited liability. Shares are sold privately (often to friends, family, or business associates) and cannot be traded on the stock exchange. It is incorporated (has a separate legal identity).

What are the key characteristics of a private limited company?

Limited liability, shares sold privately, at least one director, separate legal identity, incorporated, name must end with "Ltd", shares cannot be traded on the stock exchange.

Who can be a shareholder in a private limited company?

Friends and family, business associates, other companies, employees (through share schemes), investors known to the company.

Give 5 examples of private limited companies.

A family-owned manufacturing business, an established retail chain, a medium-sized building firm, a technology start-up (before going public), Aldi (UK), John Lewis (historically), Virgin (initially), Ikea (not public).

What document must be created to form a private limited company?

Memorandum of Association and Articles of Association.

List 5 advantages of private limited companies.

Limited liability, separate legal identity, continuity, easier to raise capital, professional image, access to specialist directors, privacy (compared to PLCs).

List 5 disadvantages of private limited companies.

Legal formalities, accounts must be published, shares cannot be traded publicly, loss of control, higher costs, more complex administration, tax.

What is the difference between a private limited company (Ltd) and a public limited company (PLC)?

Ltd shares CANNOT be sold on the stock exchange; PLC shares CAN be sold on the stock exchange to the public.

What common mistake do students make about Ltd companies and shares?

Confusing private limited companies with PLCs. Ltd shares cannot be sold on the stock exchange; PLC shares can.

What common mistake do students make about Ltd companies and liability?

Forgetting that Ltd companies have limited liability and a separate legal identity.

What is a public limited company (PLC)?

A business owned by shareholders who have limited liability. Shares are sold to the public on the stock exchange. It must have at least £50,000 of share capital and at least two directors. It is incorporated.

What are the key characteristics of a public limited company?

Limited liability, shares sold to the public on the stock exchange, at least two directors, at least £50,000 share capital, separate legal identity, incorporated, name must end with "PLC".

What is required for a business to become a PLC?

Must have at least £50,000 share capital (25% paid up), apply to the stock exchange for listing, issue a prospectus, list shares on the stock exchange, comply with stock exchange regulations.

Give 5 examples of public limited companies.

Tesco PLC, Apple Inc., Nike Inc., HSBC Holdings PLC, BP PLC, Unilever PLC, Sainsbury's PLC.

List 5 advantages of public limited companies.

Limited liability, separate legal identity, access to large amounts of capital, shares are transferable, continuity, professional image, easier to borrow, growth and expansion, attract specialist directors, lower risk for investors.

List 5 disadvantages of public limited companies.

Loss of control, high legal and administrative costs, lack of privacy, pressure for short-term profits, takeover threat, principal-agent problem, dividend expectations, public scrutiny, expensive to go public, shareholder activism.

What is the minimum share capital required for a PLC in the UK?

At least £50,000 of share capital (with at least 25% paid up).

What is the principal-agent problem?

Shareholders (principals) and directors (agents) may have different goals. Directors may act in their own interest, not shareholders', requiring monitoring and control.

What is a takeover threat for a PLC?

A company can be taken over if another business buys a majority of shares. There is a risk of hostile takeover.

What common mistake do students make about PLCs and size?

Thinking PLCs are always larger than Ltds. While PLCs are often larger, some Ltds are also very large. The difference is whether shares are available to the public.

What is a franchise?

A business arrangement where the owner of a successful business (the franchisor) grants another business (the franchisee) the right to sell its products or use its business name, brand, and systems in exchange for a fee and ongoing royalties.

What is the franchisor?

The original business that grants the franchise. Provides the brand, business model, training, and support.

What is the franchisee?

The person or business that buys the franchise. Runs the business using the franchisor's brand and systems. Pays fees and royalties.

What is the franchise agreement?

The legal contract between franchisor and franchisee setting out the terms of the arrangement.

What is the initial franchise fee?

The one-off payment made by the franchisee to the franchisor to join the franchise.

What are royalties?

Ongoing payments (often a percentage of sales) made by the franchisee to the franchisor.

Give 5 examples of franchises.

McDonald's, Subway, Domino's Pizza, KFC, Burger King, Starbucks (some stores), Holiday Inn, Speedy Cash, Anytime Fitness.

List 5 advantages of a franchise for the franchisor.

Rapid expansion, low capital investment, motivated owners (franchisees), income from fees and royalties, increased market presence, economies of scale, international growth.

List 5 disadvantages of a franchise for the franchisor.

Loss of control, potential conflicts, profit sharing, success depends on franchisees, legal and regulatory issues, reputation risk.

List 5 advantages of a franchise for the franchisee.

Established business, recognised brand, training and support, economies of scale, easier to obtain finance, lower risk, marketing support, exclusive territory.

List 5 disadvantages of a franchise for the franchisee.

High initial costs, ongoing royalties, loss of independence, restrictions, franchisor failure, contract terms, less control over profits, difficulty selling the business.

What common mistake do students make about franchisor ownership?

Thinking the franchisor owns the franchisee's business. The franchisee OWNS the business but operates under the franchisor's brand and systems.

What common mistake do students make about franchisee control?

Thinking the franchisee has no control at all. Franchisees have SOME independence but must follow the franchisor's system.

What common mistake do students make about franchisee risk?

Forgetting that franchisees still take financial risk.

What is a joint venture?

A business arrangement where two or more businesses agree to work together on a specific project or business activity for a limited period. They share the costs, risks, and rewards.

What are the key characteristics of a joint venture?

Temporary arrangement, shared costs and risks, shared profits, separate legal entity often formed, combined resources, shared decision-making.

Give 5 examples of joint ventures.

Sony and Ericsson joint venture for mobile phones (Sony Ericsson), Toyota and BMW joint venture for sports cars, Starbucks and Tata (in India), film studios collaborating on movie production, oil companies collaborating on exploration projects.

List 5 advantages of joint ventures.

Shared costs and risks, combined expertise, access to new markets, shared resources, spread risk, learning opportunities, flexibility, competition limitation.

List 5 disadvantages of joint ventures.

Disagreements between partners, loss of control, shared profits, confidentiality risk, cultural differences, management challenges, exit problems, temporary nature.

What is the difference between a joint venture and a merger?

Joint ventures are TEMPORARY for a specific project; mergers are PERMANENT integration of businesses.

What common mistake do students make about joint ventures?

Confusing joint ventures with mergers. Joint ventures are temporary for a specific project; mergers are permanent integration.

What is a social enterprise?

A business that trades for a social or environmental purpose rather than solely to make a profit for owners. Profits are reinvested in the social mission rather than distributed to shareholders.

What are the key characteristics of a social enterprise?

Social purpose (primary aim is to benefit society/environment), profit reinvestment (profits reinvested in social mission), trading activity (generates income through trading), governance (stakeholders may have a say), accountability (accountable to stakeholders and community).

Give 5 examples of social enterprises.

The Big Issue, Jamie Oliver's Fifteen, Divine Chocolate, Eden Project, Wellbeing Enterprises, community-owned renewable energy projects, Fairtrade organisations, credit unions.

What is a Community Interest Company (CIC)?

A limited company designed for social enterprises, with a community benefit purpose. An asset lock prevents assets being used for private benefit. Must report on social impact.

What is a co-operative?

A business owned and controlled by its members (workers, consumers, or both). Democratic member control (one member, one vote). Profits are shared among members. Examples: Co-op Group, John Lewis Partnership.

List 5 advantages of social enterprises.

Social impact, financial sustainability (generates income through trading), stakeholder engagement, trust and reputation, innovation, access to investment.

List 5 disadvantages of social enterprises.

Limited capital, balancing financial and social objectives, funding challenges, governance complexity, skills gap, scale limitations.

What common mistake do students make about social enterprises and profit?

Thinking social enterprises are charities that do not make a profit. Social enterprises DO make a profit, but they reinvest it in their social mission rather than distributing it to owners.

What common mistake do students make about social enterprises and trading?

Forgetting that social enterprises trade just like ordinary businesses.

When would you recommend a sole trader?

Small-scale business, low start-up capital needed, owner wants full control, owner willing to take on unlimited liability, no need for large investment, owner wants privacy, simple business operations.

When would you recommend a partnership?

More capital needed than sole trader, different skills needed from different people, professional practice (accounting, law), shared responsibility desired, partners trust each other, no need for limited liability.

When would you recommend a private limited company (Ltd)?

Medium or growing business, need to raise capital from investors, owners want limited liability, professional image required, need to attract specialist directors, business likely to grow, owners willing to share control.

When would you recommend a public limited company (PLC)?

Large business needing significant investment, need for large-scale growth, access to public capital markets, established track record, owners willing to give up significant control, need for liquidity for investors.

When would you recommend a franchise?

Person wants to use an established brand and business model, has no experience in the industry, wants lower risk of failure, has capital for initial investment.

When would you recommend a social enterprise?

Social purpose is primary, profits need to be reinvested in the mission, suitable for non-profit objectives, wants to address social/environmental issues.

When would you recommend a joint venture?

Two businesses want to collaborate on a specific project, neither wants to permanently merge, temporary arrangement is suitable, shared costs and risks are beneficial.

What is the difference between incorporated and unincorporated businesses?

Incorporated businesses have a separate legal identity from owners (e.g., limited companies). Unincorporated businesses do not have a separate legal identity (e.g., sole traders, partnerships).

What is the difference between limited and unlimited liability?

Limited liability: shareholders only lose the amount they invested, personal assets are protected. Unlimited liability: owners are personally responsible for all debts, personal assets can be taken.

Define: Sole trader.

A business owned and controlled by one person with unlimited liability who keeps all profits.

Define: Partnership.

A business owned and controlled by two or more people (usually 2-20) with unlimited liability (unless LLP), sharing profits and decision-making.

Define: Private Limited Company (Ltd).

A business owned by shareholders with limited liability, whose shares are sold privately and cannot be traded on the stock exchange.

Define: Public Limited Company (PLC).

A business owned by shareholders with limited liability, whose shares are sold to the public and traded on the stock exchange.

Define: Limited liability.

The legal status where shareholders only lose the amount they invested in the business and are not personally responsible for business debts.

Define: Unlimited liability.

The legal status where owners are personally responsible for all business debts and can lose personal assets.

Define: Franchise.

A business arrangement where the franchisor grants the franchisee the right to sell its products or use its business name, brand, and systems in exchange for fees and royalties.

Define: Joint venture.

A business arrangement where two or more businesses agree to work together on a specific project for a limited period, sharing costs, risks, and rewards.

Define: Social enterprise.

A business that trades for a social or environmental purpose, reinvesting profits in its mission rather than distributing them to owners.

Define: Community Interest Company (CIC).

A type of limited company designed for social enterprises, with an asset lock preventing assets being used for private benefit.