1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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
1.4 Legal structure

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. Number Ciphers-Legal Structure
A=1, B=2, C=3 etc. You have two minutes to work out the following terms:
End
1.4 Legal structure

20. Say what you see
Sleeping partners
1.4 Legal structure

21. 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