Ownership and finance for my business. The business I am doing is a clothes shop and I am looking to find out how this type of business will start up and get established.

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Tunji Alli

13 A

Unit 3



Task 1

The business I am doing is a clothes shop and I am looking to find out how this type of business will start up and get established.

Part a – Legal structure (P1)

In this task I am going to create a fact file on the different legal structures available to a new business starting up.  This includes:

  • Sole traders
  • Partnerships
  • Private limited companies
  • Charitable company
  • Franchise
  • Buy out.

Sole Traders

A sole trader is a type of business, which is not legally separate from its owner. The owner pays off all the debts of the business. As a result, the owners are personally liable for the firm’s debts, and may have to pay them out of their own pocket. A sole trader does not have to pay corporate taxes, but the person who organized the business pays personal income taxes on the profits made. This will make accounting easier.


The firm will be small and easy to set up.

Only a little bit of capital will be needed to start up the business so the initial start up cost will be small. The wage bill will be low because there will be few or no employees. The business will be easier to control because the person who organized the business will be able to control everything without consulting anyone.


The sole trader will not have anyone to share the responsibility of running the business. For example the sole trader might not be familiar with operating the accounts.

Sole traders are constantly working full time and will find it very hard to take time off even if they are ill.

There is also a risk of unlimited liability where the sole trader will be forced to pay the debts of the business using their personal money.

A business organized as a sole trader will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company. It can also sometimes be more difficult to raise bank finance, as sole proprietorships cannot grant a floating charge which in many jurisdictions is required for bank financing. Hiring employees may also be difficult because sole traders may not have the advertisement facility to advertise on newspapers, online, etc. where as a larger company would.


Partnerships are businesses owned by twenty or more people. A contract called a deed of partnership is normally made. This states the type of partnership it is, how much capital each party has contributed, and how profits and losses will be shared.

Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners.


The main advantage of a having a partnership is shared responsibility. This allows each person to perform work at his or her own expertise, where one partner's strengths can complement another's. For example, if a barber were in partnership with someone with a business background, one could concentrate on providing the salon service, and the other on handling the finances.

More people are contributing capital so there will be more flexibility in the business. In addition a partner can consult another partner on decisions.


The distribution 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, like a sole trader, has unlimited liability.

Ltd (private limited companies)

Private limited companies have their ownership restricted. Up to 50 shareholders the private means that shares can only be sold if all the shareholders agree. The shareholders often all members of the same family. Private limited companies have ltd after their name.

Private limited companies are only suitable if your businesses are expanding. A private limited company's disclosure requirements are lighter, but for this reason its shares may not be offered to the general public (and therefore cannot be traded on a public stock exchange).


The big advantage over sole traders and partnerships is limited liability. You can’t loose more than you invest and the shareholders have a legal existence from the limited company. Being incorporated, the company can continue trading after a shareholder dies.

Companies pay Corporation tax on their taxable profits. There is a wider range of allowances and tax-deductible costs that can be offset against a company's profits. In addition, the current level of Corporation Tax is lower than income tax rates.



There is lack of capital due to limited share issue. Profits have to be shared out amongst a potentially larger number of people Detailed Legal procedures must be followed to set up the business – consuming time and money financial information can be inspected by any member of the public once filed with the Registrar, including competitors.

Charitable Company

A charity or charitable company in England is a type of voluntary organization. A voluntary organization is an organization set up for charitable, social, and philanthropic or other purposes, and it is not part of any governing department, local authority or other statutory body. All charities are voluntary organizations, but not all voluntary organizations in England and Wales are charities. For a voluntary organization to be a charitable organization or charity, its overall goals, sometimes called the “purposes” of the organization, must be charitable. All the purposes of the organization must be charitable, as a charity cannot have some purposes which are charitable and some which are not.


There is a double advantage in that registered charities enjoy certain tax exemptions, and there are tax reliefs for taxpayers who make donations to charity.

Being registered as a charity demonstrates that the organisation is a charity in law and therefore subject to the Charity Commission's jurisdiction. This may enhance in the public a sense that the organisation is reputable. It will also enable the trustees to seek advice and assistance from the CC.

Charities can apply for grants from trusts/donors that have a policy of giving only to charities. A registered charity has more chance of gaining access to and securing funds from central government, local government, the EU and grant-making charities.


Charitable companies will suffer in when there is an economic downturn. People will not have a lot of spare cash to donate. Personal liability of charity trustees for misuse of funds.


A franchise is an agreement or license between two parties, which gives a person or group of people (the franchisee) the rights to market a product or service using the trademark of another business (the franchisor).

The franchisee has the rights to market the product or service using the operating methods of the franchisor. The franchisee has the obligation to pay the franchisor certain fees and royalties in exchange for these rights. The franchisor has the obligation to provide these rights and generally support the franchisee. In this sense, franchising is not a business or an industry, but a method used by businesses for the marketing and distribution of their products or services. Both franchisor and franchisee have a strong vested interest in the success of the brand and keeping their customers happy.


A franchise is a duplicate of a successful business concept. The franchisee owns the outlet, therefore, he hires his own employees and oversees the management its day-to-day operations. He has high stakes in the business because his money is involved.

When one buys a franchise, he is buying an established concept that has a good record of accomplishment. The franchisee is allowed the use of the company’s trademark and brand name. Because of this, the company is, in effect, giving the franchisee a license to market its products carrying a brand that is already familiar with the consumers.

Many popular franchises have instant brand-name recognition and have created a loyal following among consumers. Therefore, the franchisee is getting into a business that already has a ready market.

Compared to a non-franchise business, less capital is needed in a franchised business since the experience and tested system of operations of the parent company would already have eliminated the unnecessary expense incurred through trial and error.


In any city or region there will be only a limited pool of people who have both the resources and the desire to set up a franchise in a certain industry, compared to the pool of individuals who would be able to competently manage a directly-owned outlet. Starting and operating a franchise business carries expenses. In choosing to adopt the standards set by the franchisor, the franchisee often has no further choice as to signage, shop fitting, uniforms etc. The franchisee may not be allowed to source less expensive alternatives. Added to that is the franchise fee and ongoing royalties and advertising contributions. Franchisees must be very good at following directions in order to maintain the image and level of service already established. If the franchisee is not capable of running a quality business or does not have proper funding, this could curtail success. Franchisors usually require franchisees to follow their operations manual to a tee in order to ensure consistency. This limits any creativity on the part of the franchisee.

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A buy out is and investment transaction where a whole company or a small part of a company is bought. A firm will buy another company to take control of it. If the company is public the buyout if often called going private transaction.

A common type of buyout is a management buyout which is a form of acquisition where a company's existing managers acquire a large part or all of the company.


The advantage of a buyout is that a firm can buy an already established company with everything ...

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