Sole Trader/partnership/co op
Sole Trader
A sole trader is a business that is owned and controlled by one person. The business is known as, a 'one man business'. The business is either owned by private individuals for example friends and family, this is called the private sector, or by the public for example the government, this is called the public sector. A sole trader is:
* The single owner of the business.
* The person who makes all the decision.
* The person who is responsible if anything should go wrong.
Many people are opting to set up businesses in the private sector such as sole traders, partnerships, franchises (the right to trade under an established name) and limited companies. It is also quite straightforward is set up. Four out of ten businesses that registered for Value Added Tax (VAT) are sole traders; this shows the vast amount of businesses setting up as sole traders.
Unfortunately many sole traders will not reach Vat threshold, which is the reason why even more businesses are sole traders. There are many jobs a sole trader can be involved in, some of which are in the trade, like plumbers, electricians, builders, locksmiths and door to door repairs man. Others are local shops for local people like bakers, butchers, newsagents and of course the groups of service providers like barbers, hairdressers and driving instructors.
To set up as a sole trader you need to have a few things first, you need to have:
* A licence/permission to trade in the chosen area
* Registered for the payment of VAT
* Knowledge of health and safety laws
The main aim of a sole trader is not the same as many other businesses. Where many businesses try to make profit, a sole trader tries to survive in the business world, they must also keep their trade alive to keep their inflow of income. A sole trader keeps all the profits he/she makes. They also have to pay income tax on the profits that the business is making.
The owner has to pay Vat if turnover is large enough and they reach the vat threshold.
The owner for the business is completely responsible for all debts of the business up to the limits of his or her personal wealth. The responsibility for debts is called liability; in this case liability is unlimited.
This means that the owner can lose all their personal wealth and possession in order to pay off debts of their business.
The advantages of being a sole trader are that the owner:
* Makes all decisions.
* Keeps all profits.
* Has total control of the business.
* Can start with a little amount of capital (money).
* Can keep a simple management structure.
* Can keep the business flexible.
* Can keep business affairs private.
Partnerships
A partnership is an agreement between two or more people to take joint responsibility for the running of a business, to share in the profits and the risks. This means workload can be spread out and the risks of the business are shared.
In many cases, it is friend or family of the owner or an employee that will be taken on board as a partner.
In other words, a partnership means:
* Shared ownership.
* Shared decision making.
* Shared workload.
* Shared profit.
* Shared liability for debts.
A partnership is almost as easy to set up as a sole trader. If no formal agreement is drawn up, then the rules of the partnership are as laid down in the 1980 Partnership Act.
It is however, wise for the partners to draw up a special document, the deed of partnership Agreement, which outlines in detail:
* How profits and losses are to be shared, if not equally.
* How much money each partner is expected to put into the business.
* How much money and what share of the profit each partner will be allowed to take out of the business.
* The working arrangements of the partnership e.g. who does what in the business.
* Arrangements for removing a partner or adding a partner to a business.
* Arrangements for ending the partnership and the distribution of assets once the partnership is dissolved.
A partnership is easier to expand than a sole trader because of the involvement of more than one person, meaning more than one source of personal finance.
The business is owned by the partners equally (unless this is stated otherwise), there has to be a minimum of two partners and, in most cases, a maximum of twenty.
The partners share the control of the business equally unless the partnership agreement states otherwise. There is a certain amount of delegation in many partnerships, meaning that particular partners are responsible for particular jobs.
Partners are classed as self employed the same with sole traders. Due to the fac that they are classed as self-employed, they must pay national insurance contributions at the self employed ...
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The business is owned by the partners equally (unless this is stated otherwise), there has to be a minimum of two partners and, in most cases, a maximum of twenty.
The partners share the control of the business equally unless the partnership agreement states otherwise. There is a certain amount of delegation in many partnerships, meaning that particular partners are responsible for particular jobs.
Partners are classed as self employed the same with sole traders. Due to the fac that they are classed as self-employed, they must pay national insurance contributions at the self employed rate, income tax on the profits of the business and VAT, if their turnover is high enough.
The partners have unlimited liability. Each partner is responsible for the entire debts of the partnership, whether they have caused the debt themselves or not.
The advantages of a partnership are:
The partnership is easy to set up.
The business can gain help from an experienced or qualified partner.
The partners bring extra capital and expertise.
The responsibility of running the firm is shared; this makes the running of the business less stressful.
The finances are kept private (excluding information for tax purposes).
Division of labour means partners can specialise in what there best at.
The disadvantages of a partnership are:
The partnership has unlimited liability.
The partnership has a lack of continuity e.g. if a partner dies then a partnership is no more.
Partners can take decisions without consulting the other partners.
Even with the extra source of finance, there is still a lack of capital.
Disagreements between the partners.
Most partners in a partnership face unlimited liability for their debts. The only exception is in a Limited Partnership. This is where a partnership may wish to raise additional finance, but does not wish to take on any new active partners. To overcome this problem, the partnership may take on as many Sleeping (or Silent) Partners as they wish - these people will provide finance for the business to use, but will not have any input into how the business is run. In other words, they have purely put the money into the business as an investment. These Sleeping Partners face limited liability for the debts of the partnership. A partnership, just like a sole trader, is an unincorporated business.
Franchises
Franchising has led to a rapid growth of many high-street stores in the UK over the past 10 years (e.g. McDonalds, Burger King and The Body Shop). A franchise is a way of owning a business, without taking the risk of starting your own business. A business franchise involves the franchisor (the owner of the business) selling a business format to a franchisee (the purchaser of the business name) in return for a fixed sum of money and royalty on sales revenue. A franchise is a way for someone to set him/herself up in business under a different name. It is therefore a far less risky venture than setting up their own business. A franchise is when an established operation decides to expand by selling the business' trade to another person or company. The franchisee has a licence to trade under the franchiser's name and also to use the logos, trademarks etc. for a limited period of time in a specific geographical area.The franchisee does this so that they are able to start selling a product that has been successful in the market. The franchise system enables the franchiser to expand their business with small risk and small financial outlay. The system helps the franchiser because they have control over franchisees and have a share in the profits. The franchisee gets the benefit of the franchiser's expertise in marketing and operations. The franchisee is provided with a ready-made product, financial and management help and advice, lower start-up costs than for a business of their own, and help with the store layout.The franchiser, in some circumstances, may provide uniforms, training and other things to benefit the business. The main responsiblility of the franchisee is to run the business on a day-to-day basis and can retain most of the profits. However, the royalty must be paid to the franchisor even if a loss is made and the franchisee can have strict restrictions placed on their actions and promotions within the store, not leaving the franchisee much room for initiative. In order for the franchisee to avoid this, they must raise capital and pay fees to the franchiser. The franchisee must also pay the franchiser some of the annual profits for the use of the trade name.
The benefits of a franchise are:
* Fewer decisions to make in operating the business.
* The majority of the profit is kept by the business owner
* There is no competition in the specified area if you have an excellent franchiser.
* Selling a recognisable name to the public.
The disadvantages of being a franchise are:
* A percentage of the profit has to be paid to the franchiser.
* Only the franchiser's product can be sold.
* Longer hours at work and fewer holidays.
* The owner is not free to make their own decisions, especially for the prices at which to sell the product and the product range.
Co-operatives
Co-operatives are a form of business organization that has become quite popular in the UK but will not make an impact in the modern day world. A while ago, co-operatives were only seen in agriculture and retailing, but recently, they have been growing in service jobs and small-scale manufacturing.
Co-operatives are groups of workers, producers, consumers and investors who come together for their shared benefit. A cooperative is very similar to the PLC in many ways. It is a separate legal entity and has limited liability. Despite these there are a few important differences. Plcs share their profits among shareholders and each shareholder is given status in the business equivalent to the number of shares they hold. In a cooperative however the shareholders get 1 vote each regardless of how many shares they hold. There are different types of co-operatives found in business, but there are three most commonly found in business. These consist of:
* Workers' Co-operatives- A workers' co-operative is one that employs all of its members .These are where a group of workers decide to share everything, which are the profits, the workload and the decisions between them. Worker co-operatives produce better motivation in workers as they are working for themselves and are normally aware of their responsibilities to the community where they live. The rule of worker co-operatives is that there is no boss, the profits are divided equally and the business is run in the interests of the workforce.
* Producer Co-operatives- These are where producers join forces to share resources or marketing with each other. Producer co-operatives usually registered themselves as companies 'limited by guarantee', which means each member undertakes to fund any losses up to a certain amount. In agriculture, a producer co-operative will have a president and full time staff responsible for marketing activities and administration. They will also take responsibility for quality control and to ensure that the product reaches the market in an appropriate state. Co-operators will have to abide by the regulations of the co-operative, in regards to making sure that their products are quality.
* Marketing Co-operative- Marketing co-operatives are set up to help groups of fellow co-operators to market their products jointly. Once this arrangement is made, the co-operators can focus all their attention on what they do best, whether it is making things or anything else. This is done while specialists arrange the publicity and selling of the work. Marketing co-operatives are very popular in farming, where the co-operative takes responsibility for grading, packing, distributing, advertising, selling and other activities.
The advantages of a co-operative are:
* Each worker has a share in the business and an equal voice in making decisions, as each of them has one vote.
* Each person has an equal share of the profits.
* Its possible to form a limited company as a worker co-operative and have the protection of limited liablility.
* Rotation of jobs, in order for everybody to do the pleasant & unpleasant jobs.
* Every worker can decide for themselves whether or not they want to be owners.
The disadvantages of a co-operative are:
* Suppliers may not want to sell goods on credit for the same reaon.
* Job rotation means that some people will have to do jobs that they are inexperienced in.
* Decision making couls take a substansial amount of time if everyone is involved.
* Decisions that are made for the good of the workforce may not be good for the firm e.g. a new machine that will produce goods but make a few workers jobless.
* Discipline may be difficult in the workplace if everyone are supposed to be friends.
* Some organisations may hesitate about dealing with co-operatives because there is no recognised leader who will take responsiblility.
The main problems these co-operatives face are finance and organisation. Some organisations find it difficult to raise money from banks and other bodies. A lot of co-operatives raise capital by selling shares, while others set up management structures for making decisions.
Private Limited Companies (LTD)
Some private limited companies start out as sole traders or partnerships. They also tend to be smaller than public limited companies and are often family businesses. There has to be at least two shareholders in the business. The shares in private companies cannot be traded on the Stock Exchange, so shares can only be bought with the permission of the board of the directors. The board of directors is a committee set up to protect the shareholders' interests. In every board of directors, they choose a managing director, who runs the business on a day-to-day basis. Private companies will find it hard to raise more capital by selling shares rather than unlimited liability businesses. A private limited company issues shares to the owners of the company. Each share symbolises a share of the company and each share is equal to one vote. If this is the case, a shareholder with more than half of the shares would outvote the other shareholders of the company.
The advantages of being a private limited company are:
* The owners/shareholders normally work in the business and have an interest in its success.
* The shareholders are often directors as well and are also responsible for running the business.
* Banks are always willing to make loans to a limited company, especially if it has a good financial record in business.
* The owners cannot lose more than they have invested into the business, no matter how much money is owed, due to the limited liability in the business.
* The accounts between the owners, their accountants and the Inland Revenue are still private.
* Shares can only be transferred with the agreement of all shareholders and cannot be sold to the public.
* It is quite easy to set up a private company.
* The business can still be small due to the fact that many private limited companies have only three or four shareholders.
The disadvantages of being a private limited company are:
* It is not possible to sell shares to the general public to raise more money.
* Limited companies have to abide by more rules e.g. they have to register with the Registrar of Companies and have their accounts checked by accountants.
* A limited company are not allowed to trade under the name of an existing company if it causes confusion to suppliers or customers.
* If the company cannot pay its debts, it will go into liquidation, which is a difficult and long process.
* Profits have to be shared out among the shareholders and cannot make decisions quickly.
Public Limited Companies (PLC)
Public limited companies are the largest type of privately owned business in the UK. A public limited company has its shares bought and sold on the Stock Exchange. Many PLCs started as private limited companies and were then moved on to the Stock Exchange. Companies can have a full quotation on the Stock Exchange.They do this so that their share prices appear on the dealers' display screens.To create a public limited company, you need to apply to the Stock Exchange Council and they will check the accounts of the company. The business wanting to go public will arrange for a bank to do all the paperwork. Anybody can buy shares in a public limited company. Selling new shares is risky because the Stock Exchange has good days and bad days in the market, which is where people may want to buy shares or sell shares. If new shares want to be sold on a bad day, the company might find itself in trouble e.g. if a company hopes to sell a million shares at £1 each and it goes well, it will get £1million, but on a bad day, the company might sell half its shares at £1 each. When a company is up and running, a cheaper way of selling is to write to existing shareholders in the company, inviting them to buy more shares. The shareholders in a PLC are different from the directors. Many directors are employees that are paid to run the company. To go public, a company must have more than £50,000 and must have a good financial track record. There also needs to be enough people interested in buying shares in order for the company to have a successful flotation.
The advantages of being a public limited company are:
* Vastly increased capital as thousands of people or organisations may buy shares in the company, which makes expansion of the business easier.
* The public limited companies can be quite small- there only needs to be a minimum of two directors and two shareholders.
* Large public limited companies can operate cheaper than small companies because they can operate on economies of scale e.g. they can mass produce goods for sale and buy wholesale to save money.
* If the company is successful, the shares will increase in value and will increase the overall value of the company.
The disadvantages of being a public limited company are:
* A public limited company must be registered with the Registrar of Companies and has many regulations to abide by. If there are any problems in the company, the press could write a story on it.
* An annual meeting must be held every year and it must include the shareholders. If there are any disagreements in the company about the way it is run, the shareholders could vote against proposals made by the directors.
* Accounts have to be prepared every year and audited. The accounts have to be published so that no problems during the years cannot be hidden.
* Shareholders expect dividends in return for their investment in the company. They will also want their shares to increase in value. If their share value decreases because of a slump in the stock market, shareholders will want to sell, which is lowering the price even more than it already is. This makes the company defenceless to a take-over bid as it is cheap to buy.
* The original owners may lose most of their control power over the company, even if they still have a big number of shares.
Code breakers!
Sole proprietor: a one person business, the same as a sole trader or sole owner
Unlimited liability: responsibility for the debts of the business extends to a person's personal wealth.
Specialisation: concentrating on a particular task or job, being expert at it. Division of labour: splitting up the labour force into different specialisms so that each carries out his or her own specialism with greater efficiency.
VAT threshold: the level of turnover at which the firm has to start paying value added tax.
Delegation: giving jobs to other people, in a partnership this means that people use their skills where they will have the most effect.
Deed of Partnership: a legal document that outlines how responsibilities, profits and workload are to be shared.
Lack of continuity: because the partners make up the partnership, if one of them leaves, then the partnership is dissolved. The Partnership cannot be passed on or sold.
