The deed of partnership:
Partners can go to a solicitor to draw up a deed of partnership. This is a legal contract, which sets out:
- who are the partners
- how much capital each partner has put into the business
- how profits are shared out
- who has the majority say in any partnership meeting
- what happens if anyone leaves the partnership or if new partners are brought in?
If there is no deed of partnership drawn up the law says each partner is equal and have equal say in any meeting or decision making. But this could also lead to complications and confusion.
Advantages:
- The partners share the workload.
- All costs are shared and all partners contribute capital.
- Illness of a partner means business can continue.
- Usually each partner is a specialist. This enables the business to provide the best possible service.
- If the partnership is in financial trouble they can get money from the sleeping partner.
- Sleeping partners don't have any liability and don't play an active part in the running of the business.
- Partnerships are able to get more holidays.
- Accounts are secret.
Disadvantages:
- There can be arguments between partners over decisions.
- There is the expense of producing a deed of partnership.
- Decision-making is slower because each partner has to agree before anything new is introduced into the business.
- Each partner shares the profits.
- A partnership has unlimited liability therefore if one partner runs up the debts the other partner is liable for them.
- If a partner dies the partnership closes.
- If there is no deed of partnership then it can lead to problems.
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Franchise:
Franchising is a form of co-operation between a big form and a sole trader. The firm already has a well-known product with its own brand name. In return for an initial fee and continuing royalty payments the franchisor allows the franchisee to set up his or her own business and use the firms brand name. A big firm may decide that it wants to expand without investing large amounts of capital. The company sets up a training scheme for franchisees, and advertisers. The franchisor must be very careful in selecting franchisees. If they do not succeed, they could ruin the company’s reputation.
A franchise arrangement looks like this:
Franchisor
Franchisee Franchisee
Advantage of franchisor:
- They receive a royalty payment, which is a percentage of the profits.
- You get someone to run the business for you.
- A franchisor is very motivated.
- A franchise is easy to set up abroad.
- A franchisor can choose who he wants to work for him.
Disadvantages of franchisor:
- The franchisee can destroy the reputation of the franchise.
- The franchisee could lose money because he is not keeping a good standard of hygiene.
Advantages of franchisee:
- The franchisee gets help with advertising, training and all his stock he requires is sent to him.
- A franchisee is able to keep a lot of the profits he makes.
- A franchisee is at an advantage because he is selling well-known product and does not need to create any new ideas.
Disadvantages of franchisee:
- A franchisee is not always able to choose his own location.
- There is competition between other franchises.
- The franchisee can loose money if business fails.
- The franchisee has to pay a royalty fee.
- He has no guarantee of the franchise being renewed.
- He is not allowed to change the price or ingredients of any products.
4. Multinational/Conglomerate:
A multinational is a large company, which operates and sells products and services in more than one country.
A conglomerate is a company, which makes and sells different products and services.
Advantages:
- More customers in different countries.
- They receive additional profits.
- Have local subsidiaries.
- Have local knowledge.
- More range of product to sell for a conglomerate no risk of failure is reduced.
Disadvantages:
- The distribution of stock can become difficult.
- Controlling the subsidiaries is hard and costly.
- Communication and translation is hard.
- Workers might be cheap to employ but local customers may not be able to afford the service.
- Taxation and protection to stop multinationals from selling to many products so making local producers lose out.
5. Limited companies:
Most limited companies have two or more owners. The owners are all called shareholders. This is how the ownership of the company is decided. Limited companies are usually family owned businesses. They have limited liability this means that if the company goes out of business leaving debts the shareholders will only lose the money they have put into the company and they won't be forced to sell off there personal possessions. The more shares a person owns the more say they have in how the company is run. If a shareholder decides to sell off his share he needs to get permission from all other shareholders. Any financial accounts are not private and have to be published. It is much harder to set up. You can start up with just £2 of share capital.
There are two documents needed to set up a limited company. They are:
- The memorandum of association includes:
- Company name
- Company address
- Company objectives
- Statement of liability
- Amount of capital to be raised
- Agreement
- Articles of association includes:
- Procedure for calling a general meeting
- Method of electing directors
- Rights and duties of directors
- Borrowing power of the company
- Share transfer rules
- Division of profits
Private limited companies and public limited companies:
Private limited companies and public limited companies are the two types of limited companies you can find.
A private limited company (Ltd.) has limited liability. This means the owner is only liable for the capital they put into the business. In order to have a private limited company you have to set up two documents. They are:
- Articles of association - This shows how profits will be split and state the duties of managers.
- Memorandum of association - This states the company purpose.
After a company gets these two documents it is formally registered and receives a certificate of incorporation.
A public limited company (plc.) has many shareholders. Anyone can buy or sell plc. shares. The shares go up or down according to the profits of the plc. on demand for shares. In order for a plc to set up it needs £50 000. Decisions made in plc's usually take a long time as they have many shareholders. There is an annual meeting held each year allowing any shareholder to go and have a say in decisions. plc's are run by managers known as directors and jointly by a board of directors.
Differences between private and public companies:
- The shares of a plc must be able to trade on the stock exchange. E.g. they can be listed on the London Stock Exchange. A listing therefore means that you are able to by and sell shares on the stock exchange. A Ltd has no open market and could be a problem if they want to raise finances.
- In order to open a plc you have to have £50 000 and to open a Ltd you need just £2. In practice a plc would need to have millions of pounds to get a listing on the stock exchange.
- The amount of shareholders in a plc are more likely to me much greater than in a Ltd because the plc companies are much larger. There is no open market for a Ltd company therefore restricts shareholders to friends and family.
- Shareholders control a limited company. At each annual general meeting they elect Directors who represent the interests of the shareholders then these directors appoint managers who run the company. Therefore the managers and directors in a plc change where as in a Ltd they stay the same because it is a smaller company. From this we can see that the directors are chosen by shareholders to support their interests. However what the directors want and what the shareholders want and what the managers do aren't necessarily the same. This is known as divorce of ownership and control. Which could affect the goals of the company.
Advantages:
- A shareholder company has a lot of capital.
- A shareholder company can raise money by selling shares.
- A shareholder company is secure, popular and has a lot of customers therefore unlikely to go bankrupt.
Disadvantages:
- Shares can be bought by anyone so the control of the company is lost.
- Decision-making is slow because all shareholders have to agree.
- The company has to have accounts published this can be both expensive and loses secrecy.
- A lot of money is needed to start up (£50 000).
For my business…
For my business, I have decided to become a sole trader. There are various reasons why I made this choice most of which are the advantages of being a sole trader, which I find most appropriate for my business. Being a sole trader is the best decision for the following reasons:
- It is a simple process of setting up and doesn't contain any complicated forms or documents. This is good for my business because I can start as soon as possible.
- It is easy to run and I will be able to make all my decisions on my own without having to consult a lawyer or accountant which is both time consuming and costly.
- I will also have complete control of my business.
- The capital I need to start up my business will not be excessive.
- All profits made will come to me and if required I will split them accordingly. This means the harder I work the more profits I will make.
- As I am a sole trader my accounts will be private and no one will know how well my business is doing.
- As a sole trader I have the power to decide on my own hours and for any time I am unavailable I will employ a shop assistant.
When starting up any business you will always be faced with problems as a sole trader I have thought of all possible problems I may be faced with and are listed below.
- I will have unlimited liability, this means that I will have to pay all my debts if it were to fail.
- There may not be anyone who will carry on managing my business after I retire. I have spoken to family relatives who were interested in taking over the business in a few years. If this plan falls through I will then try to sell my business.
- If I become ill for a long period of time my business may suffer. As this is highly unlikely to happen to me within the next 20 years, as I am still young I am not worried. If so I have a supportive family who I know would be willing to help me out.
- A lot of sole traders tend to have very long hours in my case I plan to employ an assistant who will be able to help me out, which will reduce the work load.
- I may have problems raising starting up capital. This should not be a problem, as I don't expect my business to require a lot of money.
- I will require products in order for my business to run and the cost of buying products can become expensive therefore I will order in bulk which will reduce costs.
- As a sole trader I may have to do other jobs like accountancy. This fact does not bother me, as I don't mind diversification.
I have to take each disadvantage into consideration and I have tried to make them least inconvenient as possible. Overall I think being a sole trader will be to my advantage, as the advantages will help me gain from my business.
