1.4 Choosing the Appropriate Legal Structure for the Business Talking rubbish! Who sells both a certain type of fish and the base of shoes? What do you get when you take half a dance partner and add half a premiership? If three’s a crowd what is two? 1 Starting a Business 1.4 Choosing the Appropriate Legal Structure for the Business 1.4 Legal structure

1.4 Choosing the Appropriate Legal Structure In this topic you will learn about Sole trader Partnership Private limited company (ltd) The problems of setting up in business! 1.4 Legal structure

Can you define asset and debt? Sole traders A sole trader is an individual who owns and runs their own business. The simplest form of business. A sole trader has unlimited liability - they are personally responsible for all debts run up by the business. They could lose their home and all of their assets to pay off any debts that they are unable to pay. Can you define asset and debt? 1.4 Legal structure

Sole traders Benefits and disadvantages of being a sole trader Cheap and easy to set up All profits go to you! Competitors can’t see your accounts Highly motivated You are the boss! Drawbacks Unlimited liability Limited finance Difficult to find cover when ill Few specialist skills – the owner has to do everything or ‘buy in’ expertise How many hats might a sole trader wear? List all the different jobs a sole trader running a newsagents may have to do. A sole trader has to wear a number of ‘hats’ – a variety of jobs! 1.4 Legal structure

Choosing the appropriate legal structure Sarah has always dreamt of being her own boss and at the age of just 22 an opportunity arose. Patricia, the owner of the gift shop where Sarah worked, was due to retire and close the business that she had operated as a sole trader for over 40 years. Sarah wondered whether she had the necessary skills to run the shop herself and finally plucked up the courage to talk to her boss about her buying the shop. Question Time What is meant by the term ‘sole trader’. (2 marks) Explain one advantage of Patricia running the shop as a sole trader. (2 marks) Explain one disadvantage of Patricia running the shop as a sole trader. (2 marks) Identify and explain three skills Sarah would need to operate the shop as a sole trader? (6 marks) 1.4 Legal structure

Partnerships have unlimited liability – can you define this term? A partnership is where two or more people run the business Each partner is equally responsible for debts incurred. Each partner will take a share of the profits Each partner usually shares in the decision making. ‘Sleeping’ partners invest in, but do not run, the business. Partnerships have unlimited liability – can you define this term? 1.4 Legal structure

Great Partnerships Can you name the partner? Bonnie and Romeo and Laurel and Napoleon and French and Holmes and Morecambe and What makes a good partnership? What qualities would you look for in a business partner? 1.4 Legal structure

Partnerships Benefits and disadvantages of being a partnership Drawbacks Unlimited liability Arguments can occur between partners If a partner dies, resigns or goes bankrupt the partnership is dissolved Trust becomes a significant element between partners Benefits Risks and responsibilities are shared More specialist skills Simple and flexible Competitors can’t see your accounts Easier to raise finance than a sole trader Partners draw up a legal document explaining how their partnership will work, this is called a ‘deed of partnership’. 1.4 Legal structure

Proverbs Can you work out what proverbs these abbreviations stand for? APSIAPH Clue: when things aren’t going to plan do you ever chat to a friend about it? GMTA Clue: you and I are thinking the same thing! FSD Clue: when is the last time you and a friend had the same silly idea? TMCSTB Clue: the soups burnt thanks to everyone involved http://www.pubquizhelp.com/lang/proverb.html 1.4 Legal structure

Private Limited Companies Private Limited Companies have Ltd. after the company name. They can have one or more members e.g. shareholders They must have at least one director (at least 16 years old) The shareholders are often family members and have a say in the running of the company Can you define the word shareholder? 1.4 Legal structure

Private Limited Companies Private Limited Companies exist in their own right. The owners and the company are separate legal entities. Therefore, the company’s finances are separate from the owner’s personal finances. Shareholders are the owners of Private Limited Companies. Shareholders have limited liability – they are not responsible for the company’s debts. Shareholders can only lose the money that they have invested in the business in the form of shares. 1.4 Legal structure

Private Limited Companies Incorporation Private Limited Companies must be registered (Incorporated) at Companies House. They must send to the Registrar of Companies the following: A Memorandum of Association – name, registered office and what the company will do Articles of Association – the rules of running the company They must deliver to Companies House each year a true and fair set of accounts 1.4 Legal structure

Why might one firm want to see the accounts of another? Private Limited Companies Benefits and disadvantages of being a Private limited company Benefits Limited Liability Increased sources of finance More expertise available Difficult for hostile takeovers to occur Drawbacks Competitors can see financial information Difficult to sell shares for individual shareholders – other shareholders have to agree Greater legal constraints Can’t sell shares to the general public Why might one firm want to see the accounts of another? 1.4 Legal structure

How many businesses can you name with ltd after its name? 30 Second Challenge How many businesses can you name with ltd after its name? 9 10 8 12 13 7 11 6 1 End 2 3 5 4 14 15 26 25 27 28 30 29 24 23 18 17 19 20 22 21 16

Team Challenge Instructions Split class into teams of 3 Each team should have 3 sheets of paper, preferably 3 different colours Each sheet represents one type of ownership e.g. blue might be a sole trader, yellow a partnership and red a company Each team member takes one sheet and writes down something about that type of ownership Fold it over and pass on to next person Keep doing this until the sheets have been passed to each person 3 times Winning Each sheet should now have 9 statements on it Count up how many correct but different points have been made The team with the most points wins 1.4 Legal structure

Choosing the appropriate legal structure Sarah has spoken to Patricia about her idea of buying the shop and was delighted by Patricia’s response. Patricia was thrilled to think the business she had built up would continue to exist after her retirement and started the process of valuing the business. That night Sarah told her boyfriend Bobby of her idea. Bobby had just been made redundant and offered to share the business with Sarah, thinking they could set it up either as a partnership or a limited company. Question time What is meant by the term ‘partnership’? (2 marks) What is meant by the term ‘limited company’? (2 marks) Explain 2 advantages of Sarah accepting Bobby’s offer of sharing the business. (4 marks) Explain 2 drawbacks of Sarah accepting Bobby’s offer of sharing the business. (4 marks) 1.4 Legal structure

Choosing the appropriate legal structure Sarah has arranged to meet with a small business adviser at her local business link. She has decided to take advice on the most appropriate legal structure. Question time 1. The business adviser suggests that the most appropriate legal structure for Sarah would be a Limited Company. To what extent do you agree? Justify your answer. (9 marks) Review mark scheme Plan your answer! What should your structure be? Over to you! Time to show off what you have learnt. 1.4 Legal structure

the consequences of increasing the number and range of stakeholders Sole Traders Partnerships Ltd. Can you define the term stakeholder? How does the legal structure of a business influence the number and range of stakeholders? 1.4 Legal structure

Number Ciphers-Legal Structure A=1, B=2, C=3 etc. You have two minutes to work out the following terms: 12 9 13 9 20 5 4 12 9 1 2 9 12 9 20 25 16 1 18 20 14 5 18 19 8 9 16 19 15 12 5 20 18 1 4 5 18 9 14 3 15 18 16 15 18 1 20 9 15 14 19 8 1 18 5 8 15 12 4 5 18 End 1.4 Legal structure

Say what you see Sleeping partners 1.4 Legal structure

End 2 Minute Test State 2 advantages of being a sole trader State 2 disadvantages of being a partnership What 2 items must a private limited company provide to Companies House? State 2 benefits of being a private limited company State 2 stakeholders that will be affected by changing from a sole trader to a Ltd. company End 1.4 Legal structure