SOLE TRADERS, PARTNERSHIPS, SOCIAL ENTERPRISES AND FRANCHISES

Sole Traders, Partnerships, Social Enterprises, and Franchises

Learning Objectives

• Understand the features of sole traders, partnerships, social enterprises, and franchises.
• Understand the advantages and disadvantages of sole traders, partnerships, and franchises.
• Understand the concepts of risk, ownership, sources of finance, and use of profit for different types of businesses.

Two Sectors of the Economy

• The economy is divided into two sectors:
  • The private sector
    • Run by individuals and companies for profit.
    • Not run by the government.
  • The public sector
    • Comprised of organizations owned and operated by the government.
    • Exists to provide services.

Types of Businesses

• Sole Traders
• Partnerships
• Private Limited Company (LTD)
• Public Limited Company (PLC)
• Cooperatives
• Franchises

Entrepreneurs

• Entrepreneurs are individuals who set up a business themselves.
• They are the owners, and without them, the business would not exist in the private sector.

Qualities of Entrepreneurs

• Organizers
• Innovators
• Decision Makers
• Risk Takers

Roles of Entrepreneurs

• Innovators:
  • Entrepreneurs try to make money out of a business idea.
  • They spot gaps in the market, create new inventions, or conduct research.
  • Others may copy or modify existing ideas.
• Organizing:
  • Entrepreneurs are responsible for putting together factors of production.
  • They bring together materials, people, and equipment.
  • This involves delegation, making arrangements, and setting up new systems.
• Owners:
  • Entrepreneurs make key decisions.
  • They decide how to raise finance, product design, production methods, prices, recruitment, and wages.
• Risk Takers:
  • Entrepreneurs risk losing the money they invest in the business.
  • If successful, they are rewarded with profit.

Private Sector

• Comprises private individuals and firms owned by private individuals.
• Includes Sole Traders, Private Limited Companies (Ltd), Partnerships, and Public Limited Companies (PLC).

Public Sector

• Made up of central government, local government, and businesses owned by the government.
• The number of government-owned firms has decreased significantly in recent years.
• Examples include the Royal Mail.

Choosing a Legal Structure

• Choosing the right legal structure is essential for a startup.
• The goal is to minimize investment risk while being appropriate for the business.
• A crucial issue is whether the entrepreneur is personally liable for the debts of the startup.

Liability

• One key difference is between:
  • Sole traders and partnerships with ‘unlimited liability’
  • Private Limited and Public Limited Companies with ‘limited liability’

Unlimited Liability

• If a business has unlimited liability, the owner:
  • Is responsible for all debts.
  • Must pay off debts using their own money if the business cannot afford it.
  • May have to sell personal assets like their house or car to pay debts.

Limited Liability

• An important protection for shareholders in a company.
• Shareholders can only lose the value of their investment.
• However, limited liability does not protect against wrongful or fraudulent trading or personal guarantees given by directors.

Unincorporated vs. Incorporated Businesses

• Unincorporated Businesses:
  • No legal difference between the owners and the business.
  • Everything is carried out in the name of the owner(s).
  • Typically small, owned by one person or a few partners.
• Incorporated Businesses:
  • A separate legal entity from its owners.
  • The business can be sued, taken over, and liquidated.

Sole Traders

• A sole trader is an individual who may or may not employ other people but owns and operates the business themselves.
• They may be farmers or fishermen (primary sector) or small builders (secondary sector).
• Most sole traders are in the tertiary sector, such as retailers running small shops.

More on Sole Traders

• Sole traders may offer services such as web design, tutoring, hairdressing, and garden maintenance.
• They have unlimited liability, meaning they can lose more money than originally invested if the business fails due to using personal wealth to pay off business debts.

Advantages of Sole Traders

• The owner keeps all the profit.
• Complete control.
• Simple to set up – no legal control.
• May qualify for government help.

Disadvantages of Sole Traders

• Have unlimited liability.
• May struggle to raise finance.
• Long hours and very hard work.
• No continuity – if the owner dies, there is no one else to run the business.

Partnerships

• Two or more people going into business together with a view to profit.
• They share the profit between themselves.
• Common in professions like accountants, doctors, and estate agents.
• No legal formalities are required to form a partnership.
• Partners may create a deed of partnership, a legal document that states partners’ rights in the event of a dispute.

Contents of a Deed of Partnership

• How much capital each partner will contribute.
• How profits and losses will be shared.
• The procedure for ending the partnership.
• How much control each person has.
• Rules for taking on new partners.

Advantages of Partnerships

• Easy to set up and run – no legal formalities.
• Partners can specialize in their area of expertise.
• The job of running the business is shared.
• More capital can be raised with more owners.
• Financial information is not published.

Disadvantages of Partnerships

• Partners have unlimited liability.
• Profits have to be shared.
• Partners may disagree and fall out.
• Any partner's decision is legally binding on all.
• Partnerships tend to be small.

Limited Partnerships

• Some partners provide the capital but take no part in managing the business.
• These partners have limited liability and will only lose the money they originally invested.
• There must always be at least one partner with unlimited liability.

Franchises

• A franchise is when someone who does not have a business idea wants to run a business.
• Owners of franchises are called franchisors.
• The franchisor has a successful business and allows other people (franchisees) to follow it.
• Franchisees pay fees to franchisors.

What the Franchisor Offers

• A license to trade under the recognized brand name.
• A startup package, which includes help, advice, equipment, and branding material.
• Training on how to run the business and operate the systems.
• Support services for materials and equipment.
• Organized marketing support on behalf of all franchisees.
• A geographical area in which to operate.

Franchisee's Obligations

• In return for these services, the franchisee pays certain fees:
  • A one-off startup fee.
  • An ongoing fee (usually sales-based).
  • Contributions to marketing costs.

Advantages to the Franchisee

• Less risk – a tried and tested idea is used.
• Backup support is given.
• Setup costs are predictable.
• National marketing may be organized.

Disadvantages to the Franchisee

• Profit is shared with the franchisor.
• Strict contracts have to be signed.
• Lack of independence – strict operating rules apply.
• Can be an expensive way to start a business.

Advantages to the Franchisor

• Fast method of growth.
• Cheaper method of growth.
• Franchisees take some of the risk.
• Franchisees are more motivated than employees.

Disadvantages to the Franchisor

• Potential profit is shared with the franchisee.
• Poor franchisees may damage the brand's reputation.
• Franchisees may get merchandise from elsewhere.
• The cost of support for franchisees may be high.

Examples of Franchises

• McDonald's
• Pizza Hut
• Starbucks Coffee
• Taco Bell
• Domino's Pizza
• Baskin-Robbins
• KFC
• Burger King
• Dunkin' Donuts
• Subway
• Wendy's

Social Enterprises

• Social enterprises aim to improve human and environmental well-being instead of making a profit.

Features of Social Enterprises

• Have a clear social and/or environmental mission.
• Generate most of their income through trade or donations.
• Reinvest most of their profits.
• Are majority-controlled in the interests of the social mission.
• Are accountable and transparent.
• Sometimes referred to as not-for-profit or non-profit organizations.

Types of Social Enterprises

• Worker cooperatives: Businesses in which employees share ownership, contribute to production, are involved in decision-making, share in the profit, and provide some capital.
• Charities: Exist to raise money for 'good' causes and draw attention to the needs of disadvantaged groups in society, relying on donations and fundraising events.

Case Study: Kisuli, Okumu, and Owino

• A firm of chartered accountants based in Mombasa, Kenya, employing 16 staff in addition to the three partners.
• A deed of partnership was drawn up when the business was established in 2010.
• Each partner contributed KES 2,000,000 to raise finance for the business.
• Each partner was a specialist in a particular field: corporate tax, investment analysis, and audits.

Plenary Questions and Answers

1. Which of the following is an advantage of a sole trader?
   • D Independence for owners
2. Having a clear social and/or environmental mission is a feature of which business structure?
   • C Social enterprise
3. A fast method of growth is a key advantage for which business structure?
   • A Franchisor
4. Taking risk in business is a key role of which of the following?
   • B Entrepreneur