Business Purposes
The main purpose of a business is to maximise profits for its owners, or in the case of a PLC such as Tesco, its stockholders. Another purpose of a business is to sell products and provide services to customers at a cheaper price and creating a satisfied customer. The difference between profit and not-for-profit businesses is that voluntary businesses such as charities like Children In Need don’t make money, they are there to provide clothes and shelter for third world countries.
The purpose of Tesco is to create value for customers to earn their lifetime loyalty so customers will continue to buy goods from Tesco. The purpose of Tesco is also to make profit from the clothing, electrical goods, food and drink they sell.
The purpose of McDonald’s, like Tesco, is to provide its customers with food of a high standard, quick service and value for their money and to make profit from their products they sell and satisfy their customer.
Types Of Businesses
There are several different types of businesses which are sole traders, PLC (Public Limited Company), franchise, co-operatives, Ltd (Private Limited Company), charities, Government owned and partnerships.
A sole trader is a business that is owned by one person. It may have one or multiple employees. It is the most common form of ownership in the UK. The advantages of sole traders are that it’s very easy to set up, they have complete freedom and keep all the profits. The disadvantages of being a sole trader are that there is an unlimited liability which means that if the business fails then the sole trader may lose all their assets. It can be difficult to raise finance, because they are small, banks will not lend them large amounts of money and they will not be able to use any other form of long-term finance unless they change their ownership status.
A PLC is usually a well-known business such as Tesco, it is a type of limited liability company which is permitted to offer its shares to the public. It can either be a listed or an unlisted company on the stock exchanges. The advantages of a PLC are that it allows a company the freedom and flexibility to spend capital. Another advantage is that shares can be advertised and be sold through the stock exchange, large PLCs such as Tesco may find it easier to receive loans from banks, and shareholders have limited liability and cheaper bulk purchasing. The disadvantages of a PLC are that going public can be expensive, some PLCs may grow too large to manage effectively, there is a risk of takeover by rival companies who have bought shares in the company.
A franchise is a right granted to an individual or group to market a company's goods or services within a certain territory or location. McDonald’s is an example of today's popular franchises. An entrepreneur can choose to set up a new independent business and try to win customers. An alternative is to buy into an existing business such as McDonald’s and acquire the right to use an existing business idea. A franchise is a joint venture between a franchisee who buys the right from a franchisor to copy a business arrangement and a franchisor who sells the right to use a business idea in a certain location. The advantages of a franchise are that the corporate image or logo and brand awareness of the company is already established. Customers are always more comfortable purchasing items from a familiar name or company they trust. Another advantage is that the franchisor usually provides extensive training and support to the franchise owner. Financing the business may be easier; banks are sometimes more likely to lend money to buy a franchise with a good reputation. The disadvantages of a franchise are that costs may be higher than expected. As well as the initial costs of buying the franchise, the business continues to pay management service fees and they may have to agree to buy products from the franchisor. The franchise agreement usually includes restrictions on how the business should be run. The franchisee might not be able to make changes to suit their local market and all profits are shared with the franchisor.
A co-operative business is a business organisation owned and managed by a group of individuals, which would usually be the employees, for their mutual benefit. The advantages of a co-operative are that anyone is allowed to buy shares into the company, it creates a strong working commitment, and if the company is incorporated then the members of the company are entitled to limited liability. The consumers are protected against unfair trade because the stores purchase quality products directly from the producers. The disadvantages are that the stores do not exercise efficiency in management because these are managed by amateurs who are not professional managers. The inadequate finance of the store does not allow it to go for large quantity purchase. It lacks sales promotion drives by the salesmen. There is a possibility of a disagreement or an argument between members.
An Ltd (Private Limited Company) is often a small business such as an independent retailer in a local town. Shares do not trade on the stock exchange. A limited company has unique status in the eyes of the law. These types of companies are incorporated, which means they have their own legal identity and can sue or own assets in their own right. The ownership of a limited company is divided up into shares. Whoever owns one or more of these is called a shareholder. The advantages of an Ltd are that the shareholders have limited liability which is the major advantage of this type of business legal structure. Ltd companies have lower taxes which mean lower corporation tax offered advantages over self employment in recent years. Ltd company accounts have to use double entry bookkeeping to produce the year end accounts including a balance sheet with statutory notes and statements. The disadvantages of an Ltd are that the large amount of profits that Ltd companies make has to be evenly divided among all shareholders. Shareholders in an Ltd are not able to sell or transfer their shares to the general public, the shareholders must keep their shares and cannot trade them on any stock exchange.
A charity is a type of voluntary organisation, they take a distinctive legal form and has a special tax status. In the UK today there are probably over 500,000 voluntary organisations, less than 200,000 of these are registered charities. To register as a charity, an organisation must have intentions that are defined under law as charitable. These include the relief of financial hardship, the development of education, the advancement of religion and other purposes that benefit the community. The advantages of charities are that they have tax relief on income tax, corporation tax, stamp duty, VAT, rates, capital gains tax and inheritance tax. They also have increased public support as the organisation is more likely to be viewed as legitimate and worthy. The disadvantages of charities are that they have regulations and charity law requires high standards of regulation and management.
A government owned business is a business owned by the government such as hospitals, public schools, colleges, etc. The advantages of government owned businesses are that the formation of government companies is very easy because it is formed like other joint stock companies. Most of the government companies run on sound business lines as they have their extra money to run their projects. It is easy to fit in changes in its structure through amendments to articles because as most of the government companies are owned and controlled by the government. The disadvantages of government owned businesses are that as most of the government companies take the support of the public, they cannot exercise better for the effectiveness of the organisation because they are not technical persons.
Partnerships are businesses owned by two or more people. A contract called a deed of partnership is normally drawn up. This states the type of partnership it is, how much money and assets each party has contributed and how profits and losses will be shared. Doctors, dentists and solicitors are typical examples of professionals who may go into partnership together. They can benefit from shared skills but like the sole trader, have unlimited liability. A partnership can also have a sleeping partner who invests in the business but does not have dealings in the day to day running of the enterprise. The main advantage of a partnership is shared responsibility. One partner's strengths can complement another's. For example, if a hairdresser were in partnership with someone with a business background, one could concentrate on providing the salon service, and the other on handling the finances. There is less time pressure on individual partners. There is someone to discuss with over business decisions. The disadvantages of a partnership are that argument can arise over decisions that have to be made, or about the effort one partner is putting into the firm compared with another. The division of profits can cause problems. The deed of partnership sets out who should get what, but if one partner feels another is not doing enough, there can be dissatisfaction. A partnership has unlimited liability.
