Business AS Types of Business

Objective: to understand the different models for businesses Success Criteria: I can define the terms sole trader and Partnership and I can compare the advantages and disadvantages of the different business models I can apply my knowledge of these models to a case study and make appropriate business decisions

There are lots of different “ownership models”. Each one has advantages and disadvantages Do you think any of them are sole-traders? Or partnerships? Or Franchises? Or a private limited (liability)company? Or a public limited (liability) company?

Businesses have lots of different ownership models Watch this video and make notes about the different types of ownership. Try to pick out the advantages and disadvantages for each different model to help you with the next task!

Joe works for a superstore. He bought shares in the company, so that he benefits if it does well. He regularly checks the share price in the newspaper and enjoys receiving a dividend twice a year. His only worry is that if the business performed poorly, the share price could drop, and the firm may be bought cheaply by a rival who may close many of the stores. Sole trader Louise is a hair dresser. Last year she started her own business, and she now employs an apprentice. She enjoys the fact that she is her own boss and can keep all the profits after paying tax. But she finds it difficult to keep her accounts and is aware that she is personally responsible for any debts she owes. Private limited company Shahida and her brother Tariq work for the family jewellery business, started by her parents. The four own all the shares between them. They like the fact that their liability for debts is limited to the amount they each invested in the business and that all their affairs are private. No shares can be sold to members of the public. Their father owns most of the shares, so he has more votes than anyone else. Worker cooperative Andrew met his colleagues when he was at art school. They now run a design studio between them. They share the profits and make all the decisions together. Sometimes this can make decision-making slow, and occasionally people fall out – especially if some people aren’t seen to be working as hard as the others. Franchise Paula and Jane started up their own mobile business last year running ‘Tumble Tots’ classes for young children. They feel more secure trading under an established brand name, even though this cost them an initial fee and they have to pay a percentage of their earnings. They think this is worth it for the advice and help they receive, as well as professional marketing for the business. Partnership Waheed and Mohammed work together in their car valeting business. They rent space on a busy town-centre car park and offer to clean cars whilst their owners are shopping. They were worried at first that they may disagree or even fall out about many aspects of the business, but this hasn’t happened. They know they have to consult each other about the decisions they make and are jointly and personally liable for any debts that they owe. Public limited company

Joe works for a superstore. He bought shares in the company, so that he benefits if it does well. He regularly checks the share price in the newspaper and enjoys receiving a dividend twice a year. His only worry is that if the business performed poorly, the share price could drop, and the firm may be bought cheaply by a rival who may close many of the stores. Sole trader Louise is a hair dresser. Last year she started her own business, and she now employs an apprentice. She enjoys the fact that she is her own boss and can keep all the profits after paying tax. But she finds it difficult to keep her accounts and is aware that she is personally responsible for any debts she owes. Private limited company Shahida and her brother Tariq work for the family jewellery business, started by her parents. The four own all the shares between them. They like the fact that their liability for debts is limited to the amount they each invested in the business and that all their affairs are private. No shares can be sold to members of the public. Their father owns most of the shares, so he has more votes than anyone else. Worker cooperative Andrew met his colleagues when he was at art school. They now run a design studio between them. They share the profits and make all the decisions together. Sometimes this can make decision-making slow, and occasionally people fall out – especially if some people aren’t seen to be working as hard as the others. Franchise Paula and Jane started up their own mobile business last year running ‘Tumble Tots’ classes for young children. They feel more secure trading under an established brand name, even though this cost them an initial fee and they have to pay a percentage of their earnings. They think this is worth it for the advice and help they receive, as well as professional marketing for the business. Partnership Waheed and Mohammed work together in their car valeting business. They rent space on a busy town-centre car park and offer to clean cars whilst their owners are shopping. They were worried at first that they may disagree or even fall out about many aspects of the business, but this hasn’t happened. They know they have to consult each other about the decisions they make and are jointly and personally liable for any debts that they owe. Public limited company

Definition No. of owners Example of Business A sole trader A partnership A private limited company A public limited company Franchises Cooperatives Using the information from the video and from the information around the room can you fill in the gaps in this table to give yourself a comprehensive overview of the different types of business.

1.A sole trader usually has a partner to take care of running the business. 2.Being a sole trader means you get to decide what to do with the profits of the business. 3.A sole trader can’t lose more money than they’ve invested in the business. 4.Its easy for a partnership to expand by selling shares. 5.In a partnership, each owner is legally responsible for what the other partners do.

PARTNERSHIPS A partnership is a group or association of between 2 to 20 people who agree to own and run a business together. The partners will contribute to the capital of the business and will usually have a say in the running of it, and will share any profits made. Partnerships can be set up easily, even with a simple verbal agreement. However, to formalise matters, a PARTNERSHIP AGREEMENT or DEED OF PARTNERSHIP can be drawn up. Without this document, partners may disagree on who put most capital into the business and who is entitled to more of the profits. A written agreement will settle these matters.

PARTNERSHIP AGREEMENT THIS IS A DEED OF PARTNERSHIP made on ____________________ 2014 between _________________________________, ______________________ and ___________________________________________. The listed parties have mutually agreed on the terms as follows: Nature of partnership (explain the business): ___________________________________________________________ _______________________________________________________________________________________________ Location of the Business (within the school, be specific): __________________________________________________ Duration of the Partnership: ______________________________________________________________________________________________ Partnership Name: _____________________________________________________________________________________________ Bankers: _____________________________________________________________________________________________ Capital (how much each partner contributes to the partnership): _____________________________________________________________________________________________ Share of profits and losses: _____________________________________________________________________________________________ Drawings (what each partner is entitled to take out each week): ___________________________________________________________________________________________ Duties of Partners (what each partner is responsible for; e.g. Accounts, ordering supplies etc): __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ Termination of Partnership will result if either party: ________________________________________________________________________ Arbitration: All disputes that arise between partners in any matter relating to the operation of the business shall be referred to arbitration. The arbitrator (solicitor) will be _______________________________________________________________________________________________ This Partnership is binding upon the signatures of the partners and witnesses: Signed by: ________________________________________________________ (Witnessed by) ________________________________________________________ What is contained in a partnership agreement? Using the example Partnership Agreement make a list of five key items, which might appear in such an agreement. 1) 2) 3) 4) 5)

True or False? A sole trader has to work on their own therefore cannot employ anyone. It can be difficult for a sole trader to raise money to finance the business. Sole traders have unlimited liability for the debts of the business. Partnerships are better than sole traders in every aspect.

What is LIABILITY ? End Discuss

Any business or its owners must have some form of liability. This refers to who is going to be liable (responsible) for the debts of the business, should it get into trouble or has to stop trading. There are two types of liability. UNLIMITED which is what sole traders and partnerships have and LIMITED which is what private and public limited companies have – these are companies that have been incorporated (made official). With unlimited liability, the owners of the business are personally responsible for the debts of the business. Therefore, if the business runs into trouble and shuts down, any debts the business has must be paid by the owners. Even if this means they have to sell their house, car and other personal possessions in order to raise the money to pay it back. They are liable for the debt. With limited liability, the owners of the company are not taking as big a risk. If the company goes out of business they can only lose the investment they have already made in the business. No one is going to come round and ask them to sell their personal possessions in order to pay any debts the business may have. In this case the business is a ‘separate legal entity’. In other words, the business is treated like a person in its own right and the business would be taken to court – not the owners! TASK: Write yourself a QUICK reminder of the difference!

Peer Assess - Glossary of terms Unlimited liability – this is when a business is unincorporated (not a company e.g. sole trader, partnership) and so the owner/s have the same identity as the business. Thus if the business is declared bankrupt and unable to pay the debts by selling the business assets, then the owners will lose their personal possessions e.g. House, car, to cover it. Limited liability – this is when a business has been incorporated (has company status) and so has a separate identity to the owners (shareholders). This means if the business goes into liquidation the business assets will be sold to cover the debt and so the owners have lost their investment, but no personal possessions will be taken. Any outstanding debts are written off.