The Options for Start-up & Small Businesses (Edexcel GCSE Business)

Unlimited liability

• The owners are fully responsible for all debts owed by the business

• Owners are also legally responsible for any unlawful acts committed by those connected to the business

• There is no legal distinction between owners with unlimited liability and the business

• As a result, these business owners may have to use their own  personal assets to pay debts or legal fees

• E.g. a sole proprietor may need to sell their home to pay  creditors if their business fails

Limited liability

• Owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails

• Shareholders are not responsible for business debts

• In most cases, the shareholders cannot be held responsible for unlawful acts committed by those connected with the business

• Companies are  incorporated and owners are considered a separate legal entity to the business 

• This means that if a company fails, the owners would lose their investment (shares) but would not have to use their assets to meet additional debts or legal fees

• E.g. In 2018 construction company Carillion entered liquidation and the shareholders lost their investments

Sole Trader

• A business that has a single owner (although they may still hire employees)

• Easy and inexpensive to set up
• The owner has complete control over the business
• All profits belong to the owner
• Simple tax arrangements

• Unlimited liability, meaning the owner is personally responsible for any debts the business incurs
• Limited access to finance and capital
• Limited skill set of the owner/entrepreneur

Partnership

• Two or more people join together to form a business
• Good examples of this type of business include lawyers and accountants

• Easy to set up and inexpensive
• Shared responsibilities and decision-making
• More skills and knowledge are available
• Increased access to finance and capital

• Unlimited liability
• Potential for disputes between partners
• Profits are often shared equally, regardless of the contribution
• Difficult to transfer ownership

Private Limited Company (Ltd)

• The ownership of the business is broken down into a specified number of shares
• These shares can be sold by the owner, usually to friends and family or to venture capitalists
• Decision-making often rests with the person appointed to run the company, often called the Managing Director or CEO

• Limited liability, meaning the owners are not personally responsible for the company's debts
• Access to greater finance and capital
• Easier to transfer ownership
• Can have a professional image and reputation

• More expensive and time-consuming to set up
• More complex legal requirements and regulations than sole traders
• Annual financial reporting and auditing are required
• Shareholders have little control over the company as the founder usually imposes their agenda

• Centralised advertising: A ready made, well recognised brand name, which will be promoted centrally by the Franchisor
  • E.g.  Dominoes sponsored 'The Simpsons for many years
     
• Training: The Franchisor provides training such as how to make pizzas properly to ensure the quality and consistency of the brand
  
  
• Supplies are provided: The Franchisor provides equipment and supplies so that the product will be the same, regardless of where it was purchased
  
  
• Exclusive location: The Franchisor provides an exclusive area or market to sell to
  • They will not create any more franchises in that area
     
•  Support services:  Advice, training, use of software systems and problem solving are ongoing and the Franchisor may also provide the Franchisee with loans, insurance etc. 

• Overhead/Startup Cost: This is a fixed sum paid at the start of the franchise for the right to use the business name and resources
  
  
• Royalty costs:  Usually paid quarterly and varies according to the level of sales. Often equal to 5 - 10 % of sales turnover
   
• Cost of supplies: The Franchisor may sell material or equipment to the Franchisee at inflated prices
  
  
• Quality control management: If the Franchisee does not produce the good/service to the required standard set by the Franchisor, the Franchise rights can be removed from them