1.4

• Bankrupt

  When an individual is unable to pay their debts, even after all personal assets have been sold for cash
• Unlimited liability

  Treating the business and the individual owner as inseparable, therefore making the individual responsible for all the debts of a failed business
• No difference between owner and business
• Owner is responsible for actions of business and the debts
• If the business has debts the owner may have to sell their personal assets
• Types of unlimited liability

  • Sole trader
  • Partnerships
• Limited liability


  Restricting the losses suffered by owners / shareholders to the sum they invested in the business
• Legal difference between owner and business
• If the business has debts, the owner will only lose the money they have invested in the business
• Private limited company

  Has limited liability
• Advantages of limited liability

  • A company can have share capital
  • If the business needs to raise more capital by selling more shares
  • The business continues even if the owner dies
  • Owners can be more bold with decisions
• Disadvantages of limited liability

  • Initial set up fee of around £150
  • Lots of forms to fill in to become registered as a company
  • Have to have accounts audited by an accountant every year - this can be expensive (approximately £1500 per year)
• Differences between limited and unlimited liability ownership
• Sole trader


  A business owned by one person; that person has unlimited liability for any business debts
• Advantages of sole trader

  • Quick & easy to set up
  • Can start trading immediately
  • Have 100% control
  • Can make all the decisions yourself
  • Get to keep all the profit
  • Minimal paperwork
  • Easy to close / shut down
• Disadvantages of sole trader

  • Unlimited liability
  • At risk of losing all personal possessions
  • Have 100% responsibility for the business so difficult to take time off, go on holiday etc.
  • Harder to raise funds as no access to share capital
  • The business is the owner: the business suffers if the owner becomes ill, loses interest etc
  • Can pay a higher tax rate than a company if earning a lot of money
• Partnership


  A business where there are two or more owners of the enterprise with unlimited liability
• Advantages of partnership


  • Spreads the risk across more people, decreasing the burden of debt
  • Partner may bring money and resources to the business
  • Partner may bring other skills and ideas to the business
  • Increased credibility with potential customers and suppliers
  • Can share the workload
• Disadvantages of partnership


  • Unlimited liability
  • Disagreements between partners
  • Have to share the control and the profit
• Private limited company


  A business owned by shareholders (who are family & friends); shareholders enjoy limited liability
• Advantages of private limited company

  • Limited liability: personal possessions are not at risk
  • Can sell shares to outside investors to raise finance for the business
• Disadvantages of private limited company

  • Risk of losing control
  • Cost of starting up and cost of getting accounts audited every year
• Franchise


  A business that gives the right to another person or business to sell goods or services using its name
• Franchisor

  A business that gives franchisees the right to manufacture, distribute or sell its branded products in return for a fixed sum of money or royalty payment
• Franchisee

  A business that agrees to manufacture, distribute or sell branded products under the licence of a franchisor
• Royalty payment


  The percentage of the sales revenue to be paid to the overall franchise owner
• Benefits to the franchisor

  • It is a quick and cheaper way of expanding a business
  • It eliminates the need to employ huge numbers of managers to check up on every aspect of the store openings
  • The firm can expand its sales quickly
  • Receive a share of all future sales through royalties
  • Can concentrate on developing new products and services, and on good marketing and advertising
• Drawbacks to the franchisor


  • Difficult to control activities of franchisees
  • Huge risk in reputation by allowing other businesses to use their names
  • Not as quick as a method of growth as mergers or acquisitions
• Benefits for the franchisee

  • Buying into an already established brand can help to reduce the risk of the business failing
  • The franchisee gets access to free training and marketing
  • It can be easier to make money
  • It is still your own business even if you are sharing the profits with the franchisor
  • The franchisee gets advice, support and training
  • The franchisor will also supply key equipment, such as IT systems, which are designed to support the operation of the business
  • No industry expertise is required in most cases
  • The franchisee benefits from the buying power of the franchisor
  • It is easier to build a customer base
• Drawbacks for the franchisee

  • The franchisee has to pay substantial initial fees and ongoing royalties and commission
  • The franchisee cannot make individual business decisions without consulting the franchisor
  • Other franchises can be set up locally, which can cause competition for customers
  • There is always a risk that the franchisor will go out of business
  • The franchise needs to earn enough profit to satisfy both the franchisee and franchisor - there may not be enough to go round!
• Factors influencing business location

  • Proximity to market
  • Proximity to materials
  • Proximity to labour
  • Proximity to competitors
• Sectors and business location

  • Primary sector - close to raw materials
  • Secondary sector - areas with good transport links and near skilled labour
  • Tertiary sector - areas with easy access for customers
• Impact of the internet on business location

  • E-commerce business - can be anywhere
  • Product display - on a single website, allowing heavy investment in quality photos and customer interaction
  • Stock range - can keep every size and colour in stock so customer disappointments should be rare
  • Customer services location - can be anywhere, having a single location keeps costs down
  • Delivery to customer - critical to have efficient deliveries, may be hard in crowded cities
  • Head office location - can be anywhere
• Comparison of e-commerce and high street retail

  • E-commerce business - can be anywhere, having a single location keeps costs down

  High street retail business - in-store, therefore carrying high property and staff costs in multiple locations
• Marketing mix


  The combination of factors used by a business to persuade customers to buy. The four factors that make up the marketing mix are the 4P's:
• 4P's of the marketing mix

  • Product - Designing and producing a product that meets a specific customer need

  Price - Charging a price that customers are prepared to pay while making a profit

  Place - Where the product is sold and how it is distributed from where it is made to the final customer, including online sales

  Promotion - The way a business can promote sales of its products, e.g. branding, advertising, packaging, special offers
• Business plan


  A document setting out the business idea and showing how it is to be financed, marketed and put into practice
• Contents of a business plan

  • Business idea

  Aims and objectives

  Target market

  Marketing plan

  Forecast revenue, costs and profit

  Cash flow forecast

  Sources of finance

  Location
• Benefits of a business plan

  • Writing a business plan forces the entrepreneur to think carefully about every aspect of the start-up, which should increase the chances of success

  It may make the entrepreneur realise that they lack the skills needed for part of the plan, and therefore try harder to employ an expert or buy in advice

  If the plan is well received by investors, they may compete to offer attractive terms for obtaining capital
• Drawbacks of a business plan

  • Making a forecast doesn't make it happen; entrepreneurs sometimes confuse the plan with reality; poor sales can come as a terrible shock

  Problems arise if the plan is too rigid; it is better to make it flexible, so that you are prepared for what to do if sales are poor (or unexpectedly high)

  Many entrepreneurs have the whole plan in their head, not on paper

  Plans based on high sales will include lots of staff to meet the demand; risks are lower if the business starts with a low-cost/low-sales expectation

  Business success is often about people, not paper. An over-focus on a perfect plan may mean too little time is spent visiting suppliers or talking to shoppers