GCSE Business Studies/Business Ownership

Sole Traders

Sole trading is where a person decides to set up a business on their own. They may employ people but there is only one owner. Most people can set up a small business if they wish, as there is no complicated paperwork and it is a straightforward process - you don't need to do anything except start trading. Most small businesses are sole traders. *They get to keep all of the profits, and they alone decide what is done with the profits. They may decide to re-invest them back into the business to help it grow.

They get to make all the decisions about how the business is run, which means they have full control of the business.
They get to decide what to sell or what services to offer.

Disadvantages of being a sole trader:

They are unincorporated. This means that the business is not legally separate from its owner. So if someone sues the business, they sue the sole trader personally. This could lead to large court costs.
They have unlimited liability. This means that if the business goes bankrupt, they may have to sell their own personal possessions (such as house or car) to pay the debts of the business.
They may have to work long hours, and they may not get many holidays. If there is no one else to cover, the business may have to close when the owner is ill or wants a holiday, which means no income during that time.
They may not have any one to share ideas with, so the potential success and growth of the business may be limited.
They may have limited finance as there is only one owner who can put money into the business. This may be a large problem later on when the sole trader wishes to expand and requires capital to do so.

Partnerships

A partnership is basically a sole trader but with more than one owner. More specifically, a partnership can have between 2 or more (partners). Partners in a partnership have an equal say in the business and an equal share of the profits. This is unless they have an agreement called the Deed of Partnership, which declares how profits should be shared between partners. Examples include accountants and solicitors.

Advantages:

More capital (money) can be put into the business.
More people can share the workload.
More ideas can be generated.

Disadvantages:

Like sole traders, partnerships are unincorporated and have unlimited liability.
Each partner is legally responsible for what the other partners do. So if someone else makes a bad decision, everyone else has to accept the consequences too.
Disagreements are more likely to occur, as partners may want the business to go in different directions.

Limited Companies

There are two types of limited company - public and private. Both:

are owned by shareholders. The more shares you own, the bigger the proportion of the company you own, and the more control over the business you get.
are incorporated. This means that the business and its owners are legally separate identities.
have limited liability. This means that if the business fails, the owners can only lose the money they have put into the business, and nothing else - no matter how big its debts are.
must have two documents when they start up:
- A Memorandum of Association - this gives basic details of the business, like who it is and where it is based.
- An Article of Association - this sets out how the business will be run.

Private Limited Companies

Shares in a private limited company can only be sold if all the shareholders agree, and the opportunity to buy shares is restricted, usually to relatives and friends. Private limited companies have Ltd after their name in the UK.

Advantages:

Limited liability. You can't lose more money than you invest.
Incorporation. The business can continue to operate even after a shareholder dies.
Decisions can be made quicker, as there are fewer shareholders than a PLC.

Disadvantages:

They are expensive to set up, due to all the legal paperwork that must be completed.
They must publish their accounts every year.

Public Limited Companies

Anyone can buy shares in a public limited company, if they can find someone who wants to buy or sell. Shares are often sold on a stock market. Public limited companies have PLC after their name in the UK.

Advantages:

They can generate much more capital than any other type of business.
This helps the business to expand and to diversify, which can benefit shareholders with dividends from extra revenue due to increase in production and possibly sales.

Disadvantages:

A PLC can end up having a lot of shareholders.
Generally, each shareholder has little say in how the business is run, unless they own a lot of shares.
It is easy for you to lose control of the business, as someone can buy enough shares to take majority and take over the company.

Franchise

A franchise is essentially a business idea in a box. People wishing to start a business may have money to invest in a business, but no business idea. One solution is to have the rights to sell another company's products. This is a franchise. For example, most car manufacturers will sell their cars through dealer franchises. The dealer trades under their own name, but advertise and sell a particular manufacturer's cars. Branded franchises take this one step further. The franchisee (the buyer of the franchise) buys the right to trade under the name of another business (the franchiser - the seller of the franchise). As far as the public are concerned, it appears that they are buying directly from the franchiser, not a different firm. Most companies in the fast food industry sell their products through branded franchise outlets.

Essentially how franchising works is this. A franchisee (the buyer) looks into a range of franchises (business ideas) that they think they could trade in. For instance, someone may want to start a fast food outlet. Subway, McDonald's, Dunkin' Donuts, Pizza Hut, KFC are all franchises. They will want to find one that costs the same as the money they have to invest. Opening a Subway store can cost around £150,000 whereas a KFC can exceed £500,000, so initial investment will play a large part in helping the franchisee make a decision on which franchise to buy. They may visit a franchising exhibition where there are lots of trade stands and they can talk to the businesses, or they may use the Internet to research franchises, or they may use a trade magazine to find ideas.

Once the franchisee has decided which franchise to buy they then approach the franchiser and apply to become a franchisee. They may have to pass an interview, or a training/induction scheme with their recruitment team, but they will almost certainly have to meet certain requirements. The franchiser may then help them find a possible location. The franchiser will provide all the signage, the furniture (restaurant tables), equipment (cooking units), fixtures, and the products (or the ingredients to make the products) and other supplies. The franchisee must hire appropriate staff. Some franchisers may provide training of the staff at another location whilst the store / shop / restaurant is being prepared to trade.

Advantages to the franchisee (buyer):

The franchisee is buying the rights to sell a product that is already established. This makes it less risky than setting up something brand new as customers are already aware of the brand.
The franchisee gets the support of national marketing which a small business would unlikely be able to afford. In some cases of the larger brands they may already have customers waiting for their doors to open (for example in a new McDonald's).
The franchisee gets training and HQ support from the franchiser; this may be essential if the franchisee is new to running their own business and has little experience or business knowledge.
There are a lot of part-time franchising opportunities, perfect if someone has a small amount to invest and wants to support themselves and maintain their investment. They may be able to sell the franchise on to someone else once if they no longer wish to run it.
Franchisee will be able to open a business that is of interest to them. If they like eating and dining out then perhaps a restaurant franchise will suit them. If they like a quicker pace then maybe a fast food outlet would be more suitable. On the other hand they may prefer something less hands on and opt for a vending machine franchise where they just deliver and maintain the machines (to shops, schools, factories etc.) and collect a small profit from each one at the end of the week.

'Disadvantages to the franchisee (buyer):

High entry cost. It is often more expensive to start a franchise than an independent business. You can open a burger bar for the fraction of the cost of a McDonald's franchise
In some cases the franchiser may have little interest in their franchisee's success and may be more interested in just collecting the fee.
They can only sell the products of the franchise, and they may be tied into a strict set of instructions about how they should trade.
The franchisee may have to move to a different location if the franchise opportunities in their area have already been taken. This is often the case with the much larger franchises.
The franchisee may have to find or build the right location, hire and train staff and install equipment. This may be difficult for someone with limited business skills just starting out.
The franchisee may be required to buy certain items from the franchiser like computer systems and software.

Co-operatives

Co-operatives are usually formed when the priority is the people in the business rather than making profit, and they work like limited liability partnerships. Producer co-operatives are owned and controlled by the people who work there; retail co-operatives are owned and controlled by their customers. Profits are either shared equally or on a pro rata basis; salaries will tend to be different. One of the problems of co-operatives is that the only main sources of finance are the owners' capital and retained profits, which can make it harder to expand.