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The legal forms of business

Introduction

Sole Trader

Partnerships Limited Companies

CO-operatives

Franchising

Multinational Companies

Organisations and the public sectorReturn to beginning
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Introduction

A person wanting to set up a business has to

consider what legal form organisation should take.

Factors influencing this decision are:

How many owners the business is going to have?

What is the tax position of the business?

Can the owner take the risk of unlimited ability? Does the owner want all the business profits?


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continued

Is there a complete privacy in the affairs of the

business for the owner?

In the case of the owners illness or death what willhappen to the business?

Return to the main menu

Return to introduction


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Sole Trader

What is a sole trader?

Advantage of being a sole trader

Disadvantages of being a sole trader

Definitions

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Sole Trader

What is a sole trader?

Sole trader is a person who owns and operates

their own business. They may or may not employ

other people.

It is important to remember that a sole trader isusually a relatively small business with little

capital available for expansion and the capital that

has been invested comes from one source and that

is the owner.

Sole traders are common businesses. Example of

a sole trader business is a hairdresser.

Return to sole trader menu


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Sole TraderThe advantages of being a sole trader are:

Profits - they are kept by the owner. There are no

other shareholders so the profits don't have to be

split. Easy to run- every business is difficult to run

successfully but sole trader is the easiest form of

business

Easy to establish- hardly any complicated forms

or procedures. Some of the other legal forms have

to have legal forms completed before the business

can start.


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Sole Trader

Total control - the owner is in charge of the

business. He/she does not need to discuss their

decisions with any other owners. They have totalcontrol of the business.

Privacy- As there are no shareholders in the

business you only need to inform Inland Revenue

and Customs and Excise in order for them to seehow well the sole proprietor is doing


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Flexibility- very flexible working hours as sole

trader is its own boss e.g. Rather than working onFriday he/she decides to work on Sunday instead.


Sole Trader


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Sole Trader

Disadvantages of Sole Trader:

Illness- If ill the business might be forced to shut

down stopping the income and profits

Unlimited liability- if the things dont work out as

planned the sole proprietor could lose all its

investment.

Lack of continuity- because the owner is thebusiness there is no guarantee that the business

will carry on running once the owner decided to

stop.


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Sole Trader

Long hours- long hours may be required of the

owner to keep the business afloat.

Difficulty in raising capital- small businesses findit hard to find a start up capital and usually the

owner might have to put his/her house as an

insurance for capital borrowed


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Sole Trader

Limited specialisation- as the owner has to be a

purchaser, lorry driver and accountant there is no

time for this person to specialise in all fields Limited economies of scale- e.g. a small

construction business would have to hire a lorry to

do the required task as this would be cheaper but

larger business would buy its own as this wouldprove to be cheaper due to the fact that lorry is in

continuous use.



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Sole Trader

Definitions:

Sole Trader-a single owner of the business who

has unlimited liability Unlimited Liability- a legal obligation stating that

the owner must settle all debts of the business. If

the debt of a business is larger than his personal

assets than they may be forced into bankruptcy

Economies of Scale- are the factors that cause

average costs to be lower in large scale operations

than in small scale ones.


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Sole Trader

Economies of Scale- are the factors that cause

average costs to be lower in large scale operations

than in small scale ones.



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Partnership

What is Partnership?

Decisions regarding partnership

Advantages of partnership

Disadvantages of partnership

Definitions

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Partnership

What is partnership?

Partnership is a type of business where 2 or more

people agree to to own, run and trade.Partnerships require a high degree of trust and are

very common in fields such as medicine.

Return to partnership menu


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Partnership

When setting up a business a person has to decide

whether to set up a business on their own or with

others.This will depend on:

how much control they want over the business

are they prepared to share the profit

can they raise necessary capital to start up the

business by themselves


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Partnership

There is also a risk factor. Is this person prepared

to accept the risk of unlimited ability?



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Partnership

The advantages of partnership are:

easy to set up

solicitors and accountants are not required to runthe business

profits belong to the partners

privacy. Only tax authorities need to be told howmuch partners are earning and profit of the

business


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Partnership

often good relations between partners

raising capital for the business is easier than that

of sole proprietor different expertise for partners e.g. 1 specialises in

accountancy whilst the other in marketing

Some businesses have sleeping/silent partners.

They play a little role in running day to day basis

of a business but they provide the capital for the

business.



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Partnership

The disadvantages of partnership:

Disagreements between partners, which can be

bad for business some partnerships dont have a deed of

partnership, which can be bad for business

most partnerships are relatively small businesses

e.g. Shops, farms



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Partnership

Definitions:

Ordinary Partnerships- there can be between 2and 20 partners

Deed of Partnership- is the legal contract, which

sets out following:

who the partners are

capital brought into business by each partner

how profits should be shared


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Partnership

how many votes each partner has in any partnership

meeting

what happens if there is a withdrawal of a partner from

the business



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Limited companies

What is a limited company

LTD and PLC companies

Advantages of becoming a PLC company

Disadvantages of becoming a PLC company

Definitions

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Limited companies

What is a limited company?

Every limited company has a shareholers. The

term limited company refers to the fact that if thecompany goes into debt each shareholder risks

losing only the amount he has invested and his

personal belongings are safe and cant be touched.


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Limited companies

Start up stages of Limited Company

Memorandum of Assiciation Articles

Start trading

Certificate of incorporation

Companies house

Start a limited company


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Limited companies

The owners of the company are called

shareholders

they have limited liabilityTwo documents required by Registrar of

Companies to set up a limited company are:

The articles of association - this is basically the rule

book of how the company must operate. It is agreed bythe people setting up the business. The articles of

association gives details such as voting rights of the

shareholders, how the profit will be distributed, how

decisions will be reached etc.


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Limited companies

The memorandum of association - This is basically the

CV of the company. It tells people what the business

does and where it operates from. In it you could find

the details such as the names of the companies and theaddresses of their headquarters.


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Limited companies

Every year a limited company has to send audited

accounts and various other documents to the

Registrar Of Companies at Company House.Anybody who asks can see them.

Return to LTD companies menu


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Limited companies

Private Limited Companies(LTD) and Public

Limited Companies(PLC)

Difference between PLC and LTD lie in:

Sales of shares- the Public Limited Companys

shares must be tradable on stock exchange


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Limited companies

Share capital- 50,000 in share capital is required

from PLC by the law in order to start up

Size and number of shareholders- the number ofshareholders is likely to be far greater in PLC than

in LTD

Control- LTD is controlled by shareholders in

theory


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Limited companies

Every year shareholders interests are represented

at AGM(Annual General Meeting) of directors

who appoint managers to run their companies

In LTD company the shareholders, the directors

and managers are often same people because the

company is usually small


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Limited companies

In PLC company situation is different. The

managers and the directors are different form

shareholders



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Limited companies

The advantages of becoming a PLC company are:

it is easier to attract shareholders to invest money

in the business because of limited liability. Itenables a business to grow and become large



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Limited companies

The disadvantages of becoming PLC company are:

general public has the access about the companys

information giving information out is also costly in terms of

administration costs

PLC companies must comply with stock exchange

rules

it has been known that sometimes the only interest

for a shareholder is short term profit



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Limited companies

Definitions:

Articles of association- the document, whichgives the details about the relationship between the

company and its shareholders and directors

Directors- people elected by the shareholders to

represent the shareholders interests


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Limited companies

Limited liability- when shareholders of a

company are liable for the debts of a company

only up to the value of their shareholding.

Private Limited Company- a joint stock company

whose shares are not openly traded on a stock

exchange


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Limited companies

Public Limited Company- a joint stock

company whose shares are openly traded on

a stock exchangeShareholders - the owners of a company

The Registrar General- keeps records on all

UK limited companies.


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Limited companies

Divorce of Ownership and Control- this occurs

when there is a disagreement between

shareholders, managers and directors e.g. Amanager of a MNC wants to invest in a country

where a political situation is unstable but he thinks

that the gains outweigh the risks but the

shareholders disagree. If there is a continuosdisagreement between managers and shareholders

than this leads to Divorce of Ownership and

Control



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CO-operatives

What Co-operative movement is made up off?

Co-operative today

ProblemsWorker Co-operative

Advantages of Worker Co-operative

Disadvantages of Worker Co-operativeDefinitions

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CO-operatives

United Norwest Co-operative is a part of the UK

Co-operative movement. It is made up of:

Co-operative retail societies Co-operative wholesale society

and a variety of other Co-operative operations e.g.

banking and travel

Return to Co-operative menu


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CO-operatives

CO-operatives today

largest firm of undertakers in the UK

Co-operative society is based in North West ofEngland

it is the 7th largest tour operator in UK

the largest wholesaler and farmer in UK insurance societies and banks of CO-op are both

very successful



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CO-operatives

Problems

Since 1945 they have lost the market share in

grocery business. They are under intensecompetition from supermarket chains such as

Sainsbury and Tesco



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CO-operatives

Reasons being:

CO-op have been operating too many small shops

with high costs Sainsbury and Tesco were able were able to open

up bigger shops and buy in bulk, which made

them more competitive

the dividend, which kept customers loyal to CO-

op in the past became less and less important as

buyers found Tesco and Sainsbury to be cheaper


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CO-operatives

Worker CO-operatives

This is different from retail Co-operative. A

Worker Co-operative is a business,which is ownedby its workers.

As the owners are the workers they also make

decisions on how the business is run. Each worker

is entitled to one vote when making a decision andhe also owns one share of the business.



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CO-operatives

Advantages of Worker Co-operative are:

it is unlikely to be a conflict of interests between

owners and the workers because profits made bythe business go to the workers or are reinvested

back into a business

the business is likely to be conscious of its place in

community



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CO-operatives

Disadvantages of Worker Co-operative are:

difficult to persuade other workers to establish a

worker Co-operative. Partnerships are mucheasier.

new workers usually have to become new owners.

There could be difficulty in raising the capital

required to become the owner

limited companies tend to buy out very successful

worker CO-operatives


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CO-operatives

Expansion can be difficult as as it can not look for

new shareholders to finance expansion

the belief of workers that everybody should bepaid the same



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CO-operatives

Problems with Worker CO-operatives

The main problem with worker CO-operatives is

that there are too many managerial tasks so theybring in outsiders to perform these tasks e.g.

Accountancy so soon enough the workers

themselves find themselves bosses around by

other agencies.



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CO-operatives

Definitions

Consumer Co-operative - a business organisation

owned by customer shareholders and which aimsto maximise benefits for its customers

Worker Co-operative - a business organisation

owned by its workers who run the business and

share the profit among themselves



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Franchising

What is a franchise?

What the franchisor provides?

The cost to the franchiseeAdvantages to franchisee

Disadvantages to franchisee

Advantages to franchisorDoes franchise work?

Definitions

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Franchising

What is Franchise?

A franchise is a business established by one

person who the buys copyrights of another firm

and is allowed to produce and distribute thatproduct.

Return to franchising menu


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Franchising

What the franchisor provides?

training to start the business

equipment e.g. shop fittings, machinery

materials used for production

finding customers e.g. advertising

back up services e.g. a loan, advice

a brand name e.g, Coca cola,

an exclusive area in which to sell the products

goods or services to sell



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Franchising

The cost to the franchisee

Franchisors tend to charge a fixed sum at the startof the franchise agreement to cover the costs of

starting up a new branch, then they charge a fee or

a percentage of the sales that the business has

made.



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FranchisingAdvantages to franchisee are:

6-7% of franchise businesses fail

franchisor is careful in his/hers selection of

franchisee franchisor sets out at the start how much capital

franchisee will need to start the business

franchise formula has already been tested and ithas been established in the market

franchisor provides ongoing support e.g. Help to

sort out tax problems



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Franchising

Disadvantages to franchisee are:

franchisee has no freedom to manoeuvre, he has to

stick to franchise agreement franchisee can not sell the business without

franchisors permission

franchisor can end the agreement without any

explanation or compensation

if franchisee becomes successful he feel that the

franchisor is profiting from his hard work



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Franchising

Advantages to franchisor are:

due to the fact that the franchisee puts up money

from the start it allows for a faster rate ofexpansion of franchisors business

franchisee will be keen and motivated to make the

business successful and this will help franchisor



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Franchising

Does a franchise work?

Answer: not all the time

If there is a poor business plan this could lead toboth franchisor and franchisee to be out of the

business

also if a franchisee provides poor quality product

this could have disastrous consequences.



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Franchising

Definitions:

Franchise - the right given by one business toanother to sell goods and services using its name



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Multinational companies(MNC)

Company structure

Benefits of becoming a larger size company

Problems facing multinationalsDefinitions

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MNC

Company structure

Firstly we have a Parent company - that is the

company, which owns and controls othercompanies under its ownership

than we have a subsidiary - these are other

companies that are under ownership of parent

company.


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MNC

Reasons why UK MNCs have subsidiaries in

other countries may be due to the lower taxes,

cheaper materials, cheaper labour and also

subsidiary company will have limited ability.

Return to MNC menu


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MNC

Benefits of becoming a larger size company are:

allows you to compete at higher level lower costs of production

economies of scale

cost effective e.g. where you locate yourproduction

Return to MNC menu


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MNC

Advantages to a host country

they increase employment in specific area.

they educate workforce further improves standards of living

bring in new technology

Return to MNC menu


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MNC

Problems facing multinationals are:

Size- there are a lot of communication problems

as the company has a complex hierarchy. Thesubsidiaries have been known to compete against

each other due to the breakdown of communication

within the its multinational structure.

Law and politics- different countries havedifferent legal and political systems. It is very

important for subsidiary to understand the system


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MNC

Exchange rate fluctuations- MNCs sell theirproducts in several different currencies. It canhave an effect on their profits e.g. If the exchange

rate is BD$ 1=3 in month 1 and month 2 it wasBD$ 1=4 , it would be in parent companies bestinterest in order to maximise profit to withdraw itsmoney on month 1 because they will only be

paying 3 for BD$ 1 where as in second monthprice goes up to 4 for BD$ 1.

Return to MNC menu


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MNC

Disadvantages to a host country

profits exported back to home country

health and safety issues. MNC are know to cutcorners when it comes to health and Safety in

hosting country

they have been know to gain some political power

jobs offered to locals are usually low skilled

Return to MNC menu


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MNC

Definitions:

Multinational company(MNC)- is a businesswhich operates in at least 2 countries usually both

selling products and producing them in these

countries.

Return to MNC menu


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Organisation & Public Sector

Public sector

Public corporation

PrivatisationOther public sector enterprises

Ways in which government affects businesses

DefinitionsReturn to main menu


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The public sector is run and owned by the state.

2 most important parts of the state are:

Central Government- controlled from London Local Government- is the government of counties,

districts and parishes throughout UK

The public sector is a provider, producer and

buyer.


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Provider- the public sector provides a range of

services e.g. health, police, education

Producer - the public sector produces some of thegoods and provides some of the services e.g.

defence, education and healthcare.

Buyer- the public sector buys the rest of what it

provides from private sector businesses e.g. newroads and places in old peoples homes.

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Public Corporation

It is only owned by the central government who isthe only shareholder. The government sets goals

for public corporations to achieve.

It has a board of directors and this type of business

organisation is recognised in law like a publiclimited company or a Co-operative



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Privatisation

Privatisation- government selling public

corporations to private buyers. Opposite of this isnationalisation.

Things to consider when it comes to privatisation

are:

costs

prices

the product



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Other public sector enterprises are:

local leisure centres cemeteries

airports

market halls trust hospitals



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Ways in which government can affect businesses

are:

Deregulation- occurs when the governmentremoves some of these rules

Health and Safety Acts

Trade Description Act

Ending monopoly rights



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Definitions:

Contracting out- also known as sub contracting.

The company hire another firms services to do the

task within your firm e.g. Hiring a outside firm todo you cleaning duties

Nationalisation- the purchase by the state of a

private sector business

Public Corporation- a public sector enterprise

owned by the central government


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Public sector enterprise- a business owned by the

state, which sells what it produces to the private

sector. This also includes NHS(National Health

Service)


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