Types of Business – Revision Sheet



Types of Business – Revision Sheet

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Sole Trader

Anyone can be a sole trader – you just make something (Legal!) and sell it, or provide a service, e.g. carpenter, plumber, hairdresser or market trader

Advantages

✓ Simple to set up

✓ No forms to fill in, apart from tax

✓ Easy to run

✓ You choose working hours

✓ You keep all of the profits (after tax)

Disadvantages

X Unlimited Liability

X If the business fails you must pay ALL of the debts (even if it means selling your house and all your possessions)

X You are on your own!

X Total responsibility – even if you employ other people

X No Sick or holiday pay

X You provide all of the money and skills

Partnerships

2 – 20 owners

Very common type of ownership

Usually solicitors, accountants, doctors or dentists

Strict rules on setting up.

Sleeping partners allowed (someone who invests money but not involved in business)

Advantages

✓ More people involved so more capital to invest

✓ Each partner has a different specialism

✓ Work / responsibility can be shared

✓ Easy and cheap to set up

✓ Financial information remains private

✓ Can add more partners at any time

Disadvantages

← Have to share profits between partners

← Unlimited Liability

← ‘Liability’ (responsibly) to pay debts if business fails is ‘unlimited’.

← The partners might not always agree

← May be limited when raising extra capital, so may have to add new members.

Deed of Partnership

• States the responsibilities of each partner

• Legally binding agreement

• If no Deed then all partners are equal

• States how profits or losses will be shared

• How much capital each partner has invested

Private Limited Company (Ltd)

• Incorporated business

– Separate legal entity (identity). Separate to it’s owners.

• Limited Liability

– The owners liability (responsibility) to pay debts is limited to the amount of money invested e.g. £10 000 invested so only loose £10 000

• Corporation Tax is paid on profits

• Raise money by selling shares to employees, friends and family

• Has the word ‘limited’ (or Ltd) after it’s name e.g. Boots Ltd

• Must publish financial information to shareholders

• General public can ask to see accounts

Advantages

✓ Can raise money by issuing extra shares

✓ Legally it is separate from it’s owners

✓ Continuity – if a shareholder leaves then just sell on their shares

✓ Can borrow money easier from banks

Disadvantages

← Competitors can see financial records as have to be made public

← Can only sell shares to employees, directors and their families, NOT general public

← Share out profit to all shareholders (dividend)

Public Limited Company (Plc)

• Main difference between a private limited company and a public limited company is the sale of shares

– Private Limited Company sell privately

– Public Limited Company sell publicly

– Public Limited Company sells shares on stock exchange and anyone can buy them

• Must issue minimum of £50 000 worth of shares

Advantages

• Same as Private Limited Company

Disadvantages

← Expensive to set up.

← Must register with Companies House (registrar of UK companies) and complete Articles of Association

← Must publish financial information publicly

← Shareholders expect share of profit (dividend), and may not want profit to be invested in business

← Risk of takeover as anyone can buy shares

Shares

• Value can go up or down

• People buy shares as they believe they will get dividends when the company makes a profit

• If price goes down then shows people don’t have confidence that company will make lots of profit

• If price goes up then people do have confidence that company will make a profit

Public ownership

Public ownership refers to any service or industry owned by the state, for example:

• National Health Service

• Emergency services

• Armed forces

• State education

Central government controls these organisations. Their main aim is to provide essential services for the whole population. They are not profit making, and the general public pays for these services through taxation. Some services are the responsibility of local government, such as refuse collection and the maintenance of parks.

Advantages

Jobs - Usually protected, reducing unemployment.

Resources - Key supplies, e.g. water and energy, can be guaranteed and controlled.

Essential services - Health, education, housing and transport are guaranteed for everyone.

The main argument for public ownership is that the whole population benefits rather than just those who can afford to pay privately. Before the creation of the National Health Service, for example, you had to pay to see a doctor. Today we pay through taxation, but those who earn less, pay less and the unemployed are provided for.

Disadvantages

Higher costs - Providing these services means higher costs, and higher taxes.

Inefficiency - Large non-profit making organisations can be inefficient

Government interference - Politicians' interference can negatively affect the efficiency of an organisation

The main argument against public ownership is its cost. This cost is funded by taxation, either directly through income tax or indirectly through National Insurance. More public services mean a higher tax bill for everybody, including those who may not benefit from them.

Large public sector organisations are bureaucratic. They also often have a monopoly (without competition), workers can become unmotivated and inefficient. Public services such as transport and refuse collection have been contracted out to private companies (given to private companies to run) or deregulated by local councils

Co-operatives

There are two main types:

Worker co-operatives or Management Buy-outs

Printing businesses are often run as co-operatives. Sometimes groups of workers or managers buy out their company if it is in financial difficulties. By co-operating with each other, they can share expertise, buy more expensive equipment, and gain economies of scale. The members of the co-operative invest their own capital, and share the profits. The management of the firm is usually run on democratic lines. Examples of businesses run as worker co-operatives include printing, engineering and textile enterprises.

Retail co-operatives

The Co-operative Retail Societies (the Co-op) is the most familiar high street outlet of this type. It has wider aims than most other business organisations, for example, sponsoring Labour MPs, since it has political and social, as well as financial, objectives. Anyone can join, by buying shares for £1.00, but these cannot be bought or sold on the Stock Market. All members share the profits and have an equal vote to elect the management.

Holding Companies

Normally a private or public company. It owns the majority of shares on another company e.g. Boots owns Clearasil. The company which is owned by another is a subsidiary. Boots are the holding company and Clearasil are the subsidiary.

Advantages

■ Wide range of businesses can trade under different names

■ Can benefit from economies of scale

■ Overall management of business may be improved

■ Can sell parts of business easily

■ New businesses bought can be integrated easily

Disadvantages

■ Large organisation – communication difficult

■ May be involved in too many products/services (too diversified)

Multinationals

Large companies – usually Public Limited Companies

Have different parts of company in different countries

E.g. Toyota

Head Office – Japan

51 Factories in 26 countries including UK

Sells cars in 140 countries

Employs 264,000 people worldwide

Advantages

■ Production can be located near customer (reduces transport costs)

■ Gain economies-of-scale (benefit from bulk buying

■ Locate where costs are lower

– E.g. lower wages in Far East or Eastern Europe

■ Avoid trade restrictions

– Avoid import quotas if local in EU

Disadvantages

■ Communication can be difficult

– So many people

– Different languages and time zones

■ Transporting goods between countries can be expensive

■ Different laws in different countries

■ Changing exchange rates between countries

Size of organisations

A firm may want to expand for a number of reasons. The main one is that it can benefit from economies of scale. A bigger firm will probably have a larger market share and a wider range of products than if it remains small.

A large firm can borrow more cheaply. Its chances of survival are increased, as is its ability to make a profit. The larger it becomes, the more power and status it will have. This gives it a good negotiating position, if it wishes to expand still further.

The most powerful companies may want to diversify and take control of other companies. If they buy the majority of shares in another company (at least 51 % of them), this is called a takeover, with the board of directors of the smaller firm unable to prevent it.

If two companies agree to merge, it usually means a complete restructuring of the combined companies. This is called a merger. The advantages of these forms of integration are that they can expand more quickly, and diversify into other areas of production. This increases the chances of growth, and reduces the risks.

A firm's size can be measured in different ways: through its turnover, net profit, and number of employees.

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