Chapter 2: Business Structure

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Sole Trader

Sole Trader: - A person who holds the whole business in shape of finance and also
controlling/managing the business and his investment should be fixed for the long term.
An individual who trades under his/her own name.
It is totally independent.
Makes all the important decisions and responsible for paying all of the debts.
Few formalities in setting up.
Can employ as many people as he/she wish.
E.g. carpenter, coffee shop, corner store.

Advantages:-
Easy to start and end the business.
No legal formalities would be requiring.
Not accountable and answerable to anyone if he receive loss.
He is entitled to make the whole profit, so profit cannot be shared.
Can have the customer oriented product due to directed dealing with customer.
Decisions can be made quickly.
Paperwork is minimal.
Problem easier to solve.
Close contact with employees and customers.

Disadvantages:-
o Personally liable for all debts that it occurs. [unlimited liability]
o Less capital available for expansion.
o Taxed at a higher rate than a private company.
o May have difficulty in managing all business functions.
o When the sole trader dies so does the business.
o Raising capital could be difficult for one person.


Partnership

Can have between 2-20 partners.
Set up under the Partnership Act 1890.
A partnership deed can be used to set out the rights of the partners
Aim to make more profit
E.g. doctor, accountant, solicitors.

Advantages:-
More capital is available then for the sole trader because more people are contributing.
Better use of business expertise because each partners can concentrate on what they are
good at.
Better decision making because decisions are made after discussion.




Disadvantages:-
Group decisions making may cause conflict between partners
Like sole trader, partners have unlimited liability thus they are liable for all the business
depts.
Decisions making can be slower which can lead to inflexibility.
Profit must be shared.

Key terms:-
- Unlimited liability: - the owners are personally responsible for paying debts if the
business goes bankrupt.
- Limited liability: - if the company goes into liquidation, the shareholders of the
company are not responsible for paying the debts of the business.


Private Limited Company (ltd)

- A company that is legal entity in its own right.
- It can be sued and can sue.
- Shareholders own the business.
- Groups of between 2-50 people who buy the shares are called the shareholders.
- Cannot sell shares to public.

Public Limited Company (plc.)

Can sell their shared to members of the public through the stock exchange.
Must have at least 7 shareholders with no maximum limit.
Most issue a prospective detailing the history of the company and inviting the public to
buy shares.
Shares are bought and sold on the stock exchange.
Accounts must be published and audited on an annual basis.
An annual report must also be compiled each year.

Advantage (plc.)
- Limited liability.
- Easier than ltd to rise capital.
- Attract top management because of public image.
- Continuity of existence.
- Lots of publicity based on stock exchange quotations.

Disadvantage (plc.)
- High formation costs
- Accounts have to published
- Profits must be distributed to shareholders
- Ownership and control are separated because although the shareholders own the company
the Board of Directors make the decisions




Key terms:
- Shares:
o Long term sources of finance
o Sold to people who became shareholder of the company
o A plc. is able to advertise its shares for sale to the general public
o A private limited company must sell their shares privately.
- Shareholders: these are people who own part of the business.


Source of finance

- Internal sources of finance
o Retained profits
o Stock reduction
o Assets sale
o Limiting credit to customers
- External sources of finance
o Owners capital
o Hire purchase and leaning
o Overdrafts and loans
o Grants

Franchises

- Involves paying a fee and agreeing to produce goods exactly in accordance with the
franchise companys policy.
- Payments are made on a regular basis depending on profits made.
- Training and supervision are provided.

The public and private sector

- The public section includes everything that is owned by the government e.g. (army, police
force, hospital, etc.)
- Public means that they are owned by the government for the benefit of the people who
run them.
- The private sector contains all the business owned by private individuals
- Private means that these businesses are run for the benefits of the people who own them.


Strengths of the free market: private sector.
- Employers and employees can create their own personal wealth through the profit motive
and hard work.
- A greater range of products are supplied.
- People have greater freedom to choose and what they want.
- Competition helps keep prices down and encourages new ideas.

Strengths of the planned public sector
- Public services do not depend on the profit motive and will be supplied even at a loss.
- The provision of basic services available to all regardless of peoples ability to pay them.

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Feb 2012
Companies
Documentation/Legal Formalities
1) Memorandum of association:
- Name of company
- Address of head office
- Share capital
- Aim/Purpose of company
2) Articles of association (internal working)
- Name of company directors
- Shares of company directors
- Meetings records

Key terms
Dividend: - A profit distributed to shares holders as per the value of the shares decided by
Board of Government. It is income for the shareholders but an expense for the company or a
liability for the business.


Co-operatives
- Different members and work together for running up the business.
- Group of people having the one objective and they decide to work together is basically
said as co-operatives.
- All members have equal rights and they have the right of voting at important meetings.
- Profits and loss are also distributed equally among the members.

Advantage
Normally, the members of co-operatives object are one for that they can work together.
o E.g., one person who is accountant and another is a good producer of goods
suppose wheat producer. If they work together the business can process.
In co-operatives, they can buy things in bulk on cheaper rates. Like if one retailer has
required 400 units of toys and another requires 500 units of toys and if they would lose
the advantage of buying in bulk.
Working together can be good for both people in planning and decision making for the
long term and as well as short term.
As they are getting profit equally, there will be more self-motivation because they work
hard to get more benefit equally.

Disadvantage
Poor management skills.
Capital shortage
Slow decision making


Franchise
- A business that uses only the name, logo, and trading system of successful
prevailing/existing business.
- A franchise is not strictly a form of legal structure, but it is a legal contract among two
people/firms/organizations.

1) Franchisee:
a. Who use name of successful prevailing business, and logo marketing methods,
organization structure, the product formation/design, and patents of the
existing companies.
b. Franchisee can use the above discussed while investing his/her money into the
successful business.
c. Entitled to take only partial profit of the business as decided by franchisor.
2) Franchisor:
a. Successful existing/prevailing company.
b. Who make a legal contract with franchisee.
c. The actual ownership rights of logo, marketing structure methods, the style
and design of the product.
d. For enhancement or growth of the business, franchisors make legal contract
with franchisee.


Benefit of Franchising

- Less failing of business.
An established product is already getting good profit and having good name in the
market.
- Proper guidance and training.
Under well trained people they provide the good training and also give proper
guidance in business.
- Advertisement
All marketing and advertisement is normally done by franchisor on national and
international level.
- Quality of goods
The franchisors obtain the goods from well-established and good reputed supplier.
Thats why quality of goods is quite maintained.
- Not to open branch in nearby
As per legal contract, the franchisor cannot open the branch in the local area.

Disadvantages of Franchising

- Shares of the profit have to be paid to franchisor every year.
- Initial franchise licence can be expensive.
- Local promotion has to be paid by franchisee.
- If you are dissatisfied by suppliers products, you cannot change the suppliers unless
receive a consent by franchisors.
- Strict rules over pricing


Join ventures

- Two or more organisations agree to accomplish the assigned project with proper co-
operation on a particular date.
- Costs and risks of a new business venture are shared together.
- Different companied have different strengths, machineries and experiences, thats why if
they work together to project will be finished earlier.


Holding company
- A business organization that owns and controls number of separate business, but does not
unite them into one unified company.


Public corporations
- A business enterprise owned and controlled by the state a.k.a nationalized.


Advantage: -
Main objective is not to take profit.
Loss making service organisations controlled by state might still be kept operating.
Finances mainly raised by government.

Disadvantage: -
Tendency towards inefficiency as they have lack of strict targets achieves.
Subsidies from government can encourage inefficiency.
Government may interfere in business decisions due to political reasons.


Public limited company
- A limited company, often a large business, with the legal right to sell shares to the general
public by quoted on shares stock exchange market.