business unit 1 creating a business

• Types of business organization in the Private sector


  • Sole Trader
  • Partnership
  • Franchise
  • Private limited company (Ltd)
  • Public limited company (Plc)
• Sole Trader


  One person managing their own business
• Sole Trader


  • Can employ as many workers as they wish
  • Does not share the finance, control decision-making or profits with anyone else
• Unlimited liability


  The sole trader is responsible for all the business debts
• Sole traders have to raise all their own capital, which will be limited as the business is likely to be small
• It is difficult for sole traders to compete with larger businesses
• Partnership


  A way of sharing with others the responsibility for a business
• Partnership


  • Legally must consist of between 2 and 20 partners
  • Partners are responsible for any debts incurred in the business
  • Partners provide the entire capital for setting up their business
  • Partners aim to make a profit and expand
• Sleeping partner


  An additional partner who contributes capital but does not work in the business or take part in its organisation
• Partnerships are generally appropriate for professional businesses such as doctors, dentists, estate agents and solicitors
• Advantages of a Partnership


  • More capital available than a sole trader
  • Shared workload and responsibility for decision making
  • Possibility of specialisation as partners may bring different skills
• Disadvantages of a Partnership


  • Possibility of conflict between partners
  • Slow decision making
  • Compared to limited companies, the capital available is usually small
• Franchise


  A system through which successful business ideas can be hired out to other businesses in return for an initial fee and continuing royalty payments
• Franchises


  • McDonald's
  • Subway
  • Domino's Pizza
• Advantages of a Franchisee


  • Customers know the established brand
  • Increased borrowing power from banks
  • Continuous support and training from the franchiser
• Disadvantages of a Franchisee


  • Loss of individuality as the franchisee must follow the franchiser's rules
  • Initial set up price, royalty and continuous payments
  • Risk of failure if the franchise is not successful
• Advantages of a Franchiser


  • Royalty payments from franchisees
  • Faster growth as the business can expand more quickly
  • Benefits from economies of scale
• Disadvantages of a Franchiser


  • Loss of control over the daily running of the franchise
  • Decreased profits if franchisees perform poorly
  • Potential for the franchise to grow too quickly and experience diseconomies of scale
• Private Limited Company (Ltd)


  Shares are owned by friends and family, not sold to the public
• Public Limited Company (Plc)


  Shares are bought and sold on the stock exchange, open to the general public
• Limited companies


  • Have limited liability, meaning owners only lose the amount they invested
  • Have separate legal existence, so the company can be sued rather than the owners
• Shareholders


  People who invest money in the company and become part-owners
• Types of shares


  • Ordinary shares (receive dividends based on company performance)
  • Preference shares (guaranteed fixed dividend)
• Board of Directors


  Appointed by the shareholders to take overall responsibility for running the company
• The people who own the company (the shareholders) do not control the day-to-day running of the company
• To set up a limited company, the Memorandum of Association and Articles of Association documents must be filed with the Registrar of Companies
• A Trading Certificate is issued once the company has sold shares and raised enough capital to begin trading
• Advantages of a Public Limited Company


  • Large amount of capital available from selling shares on the stock exchange
  • Can pursue growth objectives
  • Attracts investors
• Disadvantages of a Public Limited Company


  • Lack of privacy as financial information must be publicly available
  • Slow decision making as many people have to be consulted
  • Shareholders have little say in running the business
• The public sector refers to businesses owned and run by the government for the benefit of the people
• Specialisation and division of labour

  Higher quality
• Managers


  Make all the decisions
• Shareholders


  Owners but directors and have no real say in the running of the business
• Decision making


  Slow as a series of meetings held and number of people have to be consulted, missed opportunities in the market place
• Limited Company


  May have the letters after its name but this can vary from country to country and the business may not always choose to include these letters in their branding
• Public Limited Company (PLC)


  Owned and managed by its shareholders, however, unlike Private Limited Company it is able to sell its shares to the general public on the stock exchange
• Public Sector


  • Public Corporations
  • Municipal Undertakings
• Public Corporations


  A body set up by the government, often nationalised industries, they can be market-controlled, the overall aim is to provide a service, they are also expected to break-even but this is often not possible
• Reasons why industries have been taken over by the public sector


  • Services are essential but no profit, capital investment is too high for privately owned businesses, safe and dangerous industry for private people to fund, prevent monopolies from setting high prices, business could be failing and the government took over, to save jobs, to prevent wasteful duplication of services
• Aims of Public Corporations


  Provide services, expected to break-even but often not possible, not making a loss