2 private ownership

H BM - BUSINESS ACTIVITY 1

Types of business organisation

Organisations fall into 3 different categories:

Private VoluntaryState


Private Sector

Private sector plays an important role

creates goods and services

employs millions of people

varies in size from Shell and ICI to corner shops

driving force for change and improvement


Sole Trader

Most common form of business ownership:

no complicated legal requirements

decisions can be made quickly

close contact with customers and employees

all profits retained/high satisfaction


Sole Trader

Some disadvantages:

all decisions are made by owner

long hours

unlimited liability

sourcing finance


Partnership

2-20 people in a partnership

partners can share skills/knowledge

organisation could provide 24/7 service

easier to raise finance


Partnership

Some disadvantages

disputes

unlimited liability (except sleeping partner)

difficult to raise large amount of capital

decision making process is slower


Partnership Deed

Legally binding agreement

covers

share of profits, salary, drawings, duties and responsibilities, cessation of partnership, death of partner.


Ownership – Question……

Explain the advantages and disadvantages of being a sole trader. (6)Distinguish between operating as a sole trader and a partnership. (4)

INTERNET RESEARCH –

PARTNERSHIPS – WHAT IS A LIMITED PARNTERSHIP

WHAT HAPPENS WHEN A PARTNER DIES

FIND THE BEST RATE OF INTEREST FOR NEW BUSINESS START-UPS


Solution – Distinguish between operating as a sole trader and a partnership.

A sole trader is run by one person whereas a partnership is run by 2 – 20.A sole trader is able to make quick decisions whereas in a partnership decision making is slower as all partners are consulted.A partnership can raise more capital than a sole trader as all the partners introduce capital.A sole trader may work longer hours whereas in a partnership the workload is shared. It may be possible to trade 24/7 whereas this would be impossible in a sole trader.


The Company

owned by shareholders - shareholders unlikely to run the company

a separate legal body

shareholders have limited liability

company has to be registered with Companies House

Articles of Association and Memorandum of Association must be provided


The capital of a company

authorised share capital - £200,000

issued share capital - £80,000

paid-up share capital -£40,000


Private company (Ltd)

Usually small

shareholders 2+

shares not traded on Stock Exchange

Shareholders are “invited” - may be family or friends

may find it easier to raise finance that unlimited liability organisations


Public company (plc)shares bought and sold in stock exchange

large amounts of capital can be raised quickly

costly to have shares quoted on SE

may not raise all capital required if SE has a bad day

original shareholders can lose control


Private Sector Questions

Read pages 37 – 42 then complete the following questions in your jotter:Question 1 (page 38)Question 2 (page 39)Summary questions (page 45)“Orange” case study (page 46)


Franchises

Growth area - increasingly popular form of ownership

Hiring out of a good idea

A franchise grants permission to sell a product and trade under a certain name within a defined area


FRANCHISEa business arrangement where one

firm pays for the right to trade under the name of another

FRANCHISER - the business which sells the right to trade using its name to others, eg, McDonald’s, Hertz

FRANCHISEE - the person who buys the right to trade using the name of the mother company


franchise

Franchiser sells the ideaFranchisee pays for the franchiseCapital has to be found by franchiseeMaterials/supplies must be bought from franchiserPercentage of profit/turnover returned to franchiserFranchisee has a local monopoly and is trading under a well-known name


Why buy a franchise?existing, established product therefore more chance of successcheaper market research and promotional costsmay receive help and training from franchiserlower start up costs


Why sell a franchise?

quicker growth - can cover wider geographical area more quickly without having to buy premises or pay staffprovides funds - franchisee must buy franchise and pay part of its profits to franchisor


DISADVANTAGES

reputation of the company/brand depends upon how good the franchisees are

franchisees are bound by contract which restricts what they do

part of profits/turnover must be paid to franchiser


Why so popular?

96% of franchises are still in profit after 5 years.(Only 66% of small firms survive the first 3 years)

There are some 718 business format franchises in the UK comprising over 35,000 franchisees all with a variety of former careers.

Average investment of £42,700

We all know that McDonalds and Thornton's Confectionary are franchised, but there are many others.


Franchising - Question

Explain the costs and benefits of franchising for: the franchisorThe franchisee (8)

To answer you must ID the cost or benefit then explain why it is a cost or a benefit.


Franchising - QuestionExplain the costs and benefits of franchising for:

the franchisorThe franchisee (8)To answer you must ID the cost or benefit then explain why it is a cost or a cost or benefit.

Answer:

A benefit of franchising for the franchiser is the potential to expand quickly. They can expand quickly because the franchiser can sell licences over a wide geographical area without having to manage the individual branches. (1 mark)

A cost to the franchiser is the reputation of the company is outwith their control. This is because the success of the business is dependent on the skills and expertise of individual franchisees (1 marks)

2 private ownership

Economy & Finance