Chapter 13 (unit 2 start)

Sole traders, Partnerships and limited companies.

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  • Created by: Melonball
  • Created on: 24-04-14 15:47

Sole traders

A sole trader is a person who is in the business on their own.

Advantages:

  • The owner has independance and can run the business without others being involved in making decisions.
  • In a small business with few employees; the owner is able to give personal service and supervise all areas.
  • The business is easy to establish legally - either using the owner's name, or a trading name.

    Disadvantages:
     

  • The owner has unlimited liability for the debts of the business. This means they are responsible for any debts the business owes and can lose their own assets.
  • Expansion is limited because it can only be achieved if the owner saving lots of profits or borrowing money from a bank.
  • The owner usually has to work long hours and finding time to take holidays may be difficult.
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Partnerships

Partnership act of 1890: More than 1 person carrying on a business with the goal of making a profit. Partnerships are usaully betweer 2-20 people.

Advantages:

  • Easier to increase capital that is put in.
  • Partners may be able to specialise.
  • With more people running the business, there is more cover for illness and holidays.

    Disadvantages:

  • Decisions may take longer as other partners need to be consulted.
  • May be disagreements amongst partners.
  • Each partner is liable for the debts of the business.
  • The retirement or death of a partner may adversely affect the running of the business. 

Partnership agreements-  partners can make an agreement where they can earn salaries, how profits get shared out, charge interest for drawings or reveive interest on capital and at what rate.

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Limited Companies

A limited company is a separate legal entity, owned by shareholders and run by directors.

Why run a business as a limited company?

  • Limited liability - shareholders can only lose the amount that they invest. Personal assets are needed to pay the company's debts which means there is less risk for investors.
     
  • Separate legal entity - a limited company is a separtate legal enitity from its owners. Anyone taking legal action proceeds against the company and not the individual shareholders.
     
  • Ability to raise finance - substantial funds can be raised by issuing shares.
     
  • Membership/ Owning shares - Ordinary shareholders have voting rights. This means control of the business is lost.
     
  • Other factors - The company gets a higher status than a sole trader's so it is easier to benefit from economies of scale.
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the Companies Act

There are 2 main types of limited company: Public limited company (Plc) and Private limited (Ltd)

Public limited company:
A company may become a public limited company if it has:

  • Issues share capital over £50,000 
  • At least 2 shareholders and at least 2 directors

A public limited company may raise capital from the public on the stock exchange but they don't have to issue shares on the stock market.

Private limited company:
Many private limited companies are small often in family ownership. A Ltd has:

  • no minimum requirement for issued share capital
  • at least one shareholder and at least one director who may be the same shareholder.

The shares are not traded publicly. The individuals can be chosen to be a shareholder 


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final accounts of limited companies

The main difference is that limited companies have a statement of changes in equity which shows how profit has been distributed including the dividends to shareholders.

Statement of changes in equity 

Retained earnings                               £
Balance at start of year                       x
Profit for the year                                x
Transfers from other reserves               x
                                                       -----
                                                        x
Dividends paid in the year                  (x)
Transfers to other reserves                 (x) 
                                                       -----
Balance at the end of year                  x
                                                       -----       Dividends paid include interim dividends which are                                                                      paid over half way through the year

Chapter 17 looks at this in more detail. 

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