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Chapter 3

Sole Traders, Partnerships, social enterprises and franchises

Entrepreneurs

People who set up businesses are called entrepreneurs.

They play four important roles

1. Innovators: it means someone who introduces changes or new idea.

E.g. new business ideas, new inventions, finding the gaps in the market etc.
2. Organizers: entrepreneurs organize the other factors of productions namely land labour
capital in order to do the production
3. Decision makers: entrepreneurs have to make various decisions such as raising finance.
Pricing, designs etc.
4. Risk takers: it means every entrepreneur has a possibility of failing

Unincorporated and incorporated businesses

Unincorporated businesses mean businesses where there is no legal difference between the
owner and the business.

E.g. Sole trader, partnership

Incorporated businesses are that have a separate legal identity from that of owners

E.g. private limited companies, public limited companies

Sole trader [Sole proprietor]

It is a business owned by a single person

E.g. farmers, fishermen, hair dressing, taxi drivers etc

Sole trader got unlimited liability. It means owner of the business is personally liable for all the
business debts.

There are advantages and disadvantages of a sole trader

Common benefits are

 Owners keep all profits

 Owners take all decisions and no need to consult with others (saves time)
 Easy to start (less legal requirements)
 Able to choose patterns and times of working
 Close relationship with customers and employees
 Business can be based on interest and skills of the owner
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Common problems are

 Lack of capital for expansions

 Unlimited liability
 Intense competition from bigger firms
 Owners have to be skillful in every aspect of the business (operation/HRM/Finance etc)
 Raising capital is difficult
 Long hours of work
 Lack of continuity

Partnerships

Partnership is a business owned by 2 to 20 people

They share profit and unlimited liability

There are no legal formalities when starting a partnership but partners may have deed of
partnership

Deed of partnership is a legal document that states the norms and rights for the partners
[contribution of each partner, how the profits are shared, how the partnership ends, controls
by each partner, taking a new partner etc.]

Common benefits of a partnership are

 Different partners may be specialized in different areas

 Shared decision making
 Additional capital invested by partners
 Losses are shared
 Greater privacy and least legal formalities

Common problems are

 Unlimited liability
 Shared profits
 No continuity
 Partners are bound by the decision made by other partners
 Not possible selling shares
 Collective decision making consumes time
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Limited partnerships

These are the partnerships where some partners contribute capital and enjoy the share of their
profits but do not take part in the running of the business. They are also known as sleeping
partners.

In a limited partnership at least there should be one partner who has got unlimited liability.

Franchises

It is structure in which a business [franchisor] allows another operator [franchisee] to trade

under their name. E. g Pizza Hut, KFC, Mc Donald’s etc.

Franchiser offer the franchisee

 License
 Startup package
 Training
 Marketing support
 Exclusive geographical area etc.

Franchisee will provide franchisor

 Startup fee
 Ongoing fee
 Contribution to marketing cost
 Profits on merchandise provided by franchisee

Advantages to the franchisor

 The franchisee buys a license from the franchisor to use the brand name
 Expansion of the franchised business is much faster than if the franchisor had to finance
all new outlets
 The management of the outlets is the responsibility of the franchisee
 All products must be obtained from the franchisor.

Advantages to the franchisee

 The chances of business failure are much reduced because a well-known product is
being sold
 The franchisor pays for advertising
 All supplies are obtained from a central source -the franchisor.
 There are fewer decisions to make and business-prices, store layout and range of
product will have been decided by the franchisor.
 Training for staff and management is provided by the franchisor.
 Banks are willing to lend to franchisees Due to relatively low risk
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Disadvantages to the franchisor

 Poor management of one franchised outlet could lead to bad reputation for the whole
business
 The franchisee keeps profits from the outlet

Disadvantages to the franchisee

 Less independence than with operating a non-franchised business.

 May be unable to make decisions that would suit the local area-e.g. new products that
take not part of the range offered by the franchisor.
 License fee must be paid to the franchisor and a percentage of the annual turnover

Social enterprises

They are the businesses that aim to improve human or environmental wellbeing

They have following features

1. Clear social and environmental objectives

2. They generate income through trade or donations
3. They reinvest the profit to further achieve their objectives
4. The main interest of the business is the welfare of the society
5. They are accountable and transparent

There are several types of social enterprises

Cooperatives: it is a company, factory or organization in which all the people work their own
and equal share of it. There are several types of cooperatives

 Consumer cooperatives: owned by consumers / they sell goods and services

 Retail cooperatives: owned by retail members
 Worker cooperatives: owned by workers

Main features are

 All members can contribute to the running of the business

 All members have one vote in meetings
 Profits are equally shared among members

Advantages of cooperatives are

 Common social problems can be solved

 All the members can share the economic benefit equally
 Good motivation for all the members as they share the profits equally
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Disadvantages are

 Poor management skills (unless there are professional managers)

 Capital shortage because only the members can contribute to the capital
 Slow decision making since the consent of all the members are necessary

Charities: these are the organizations that give money, goods or services, health care to people
who are poor, sick or in need e.g. orphanages, elders home etc.

Charities raise funds through donations