<1.4 BUSINESS TYPES>

• A SOLE TRADER (SOLE PROPRIETOR) refers to a type of business organisation that consists of a SINGLE OWNER.

• Examples can include private tutors, freelance photographers, plumbers etc... 

• My tutoring service business, called BOUNOMICS is run just by me and was very easy to set up, I only needed to invest a small amount of capital to buy my laptop and printer, also the legal requirements were minimal. I love working on my own because I have no-one to answer to, no-one to rely on, no-one to argue with, I can take as much time off that I want for holidays and keep all the company profits and secrets to myself. Also in my business it is very important to have personal contact with my customers to build up a rapport so its best for me to stay small. 

• This is fortunate for me, because if I want to expand it is extremely difficult as the only capital I have to invest are my own savings and retained profits, as the banks think I am too risky to lend to, and I can’t exactly issue shares can I?

• There are many problems with this type of business though, for example when it comes to doing my accounts I always waste so much valuable time and energy, and even then I make a lot of mistakes. In addition, when I’m sick I don’t make any money as I have no-one to cover for me and even if I could afford a helper, nobody wants to work for me as I can only offer low pay and zero professional development. Another drawback is the fact that I don’t have enough business nor capital to buy large quantities of my equipment such as paper and pens, so I can’t get any discounts and lower my average costs by buying in bulk.

• My biggest fear is going out of business and not being able to pay my mortgage and other expenses, apparently, my type of business has unlimited liability, meaning that if I owe suppliers money and I can’t afford to pay them, the law can take my home and sell it to pay them back and of course being on my own means I can’t share this risk with anyone else. I tell you, this type of stress is enough to send me to an early grave, which incidentally would be the end of Bounomics for good as this type of biz has no continuity meaning Bobby Junior will have no legacy from his old man…sigh!!!!....Well back to work!!!!

• Read the above stage of Bob’s story and highlight all the pros in GREEN and all the cons in RED.

• A PARTNERSHIP refers to a type of business organisation that usually consists of BETWEEN 2 TO 20 OWNERS.

• In most cases the partners will create a PARTNERSHIP AGREEMENT (AKA a 'DEED OF PARTNERSHIP'), which details the amount of capital invested by each partner as well as how the profits are to be divided. 

• ….rather than work with complete strangers, I decided to call a couple of old mates, and apparently they were having the same problems and thoughts with their own tutoring businesses, so I proposed we get together and create a partnership. It was easy to set up, though we had to limit ourselves to just 20 as according to the law this is the maximum allowed, it’s the same for lawyers and dentists as well apparently, anyway we have 3 partners at present, and I reckon it won’t be too hard to attract new ones, nor secure extra finance from the bank at slightly lower interest rates than sole traders, now that we are an established professional company, though of course we still can’t issue shares what with the 20-owner limit.

• Anyway, this way the company now has more capital, as we are all putting our savings into the business and sharing the risks and benefits so we should all be motivated to work our hardest.  Also we can cover for each other when we are sick and specialise in the areas we know best, such as teaching, marketing and accounting. The legal requirements were not very substantial but we did need to create and sign a deed of partnership, detailing the size of our individual investments, duties, profit distribution, length of partnership and any arrangements for holidays and so on. I guess now I can’t take time off when I want as I’m not in complete control anymore sigh!!! Oh well! At least I still get to have personal contact with the clients.

• My biggest worry now, is how reliant I am on the other partners efficiency and honesty, now there are 12 heads we often have disagreements about the direction of the company, which slows operations down and if one of them slacks then everyone will suffer and as we still have unlimited liability, bankruptcy will still affect our personal property, thankfully, our internal accounts still don’t need to be declared to the public. Another drawback is the fact that if a partner dies the whole partnership has to be dissolved as there is still no continuity in this type of organisation either.

• Copy and paste the net stage into your doc and highlight all the pros in GREEN and all the cons in RED.

• A PRIVATE LIMITED COMPANY refers to a type of business organisation that is OWNED BY UP TO 50 SHAREHOLDERS, who are NOT PERMITTED TO PUBLICLY TRADE THEIR SHARES.

• ….Business continues to boom, but we had exhausted our savings and didn’t want to take anymore loans, as we were still completely liable for any  credit issues, and most of us had young families to support.

• I talked to a lot of my friends and family, and they really wanted to invest, but of course in a partnership, ownership is limited so my mate James suggested, we change to a private limited company. It sounded ideal because firstly, we can easily get the capital finance we need to expand by issuing shares to people we know and trust. They will receive part-ownership and a profit share, based on the number of shares they actually buy, and of course the number of shares we issue is up to us, so we can still stay in control as directors as long as we own the majority. 

• Secondly, I was so fed up worrying about the possibility of losing my home if the company gets in to trouble that this way we become ‘incorporated’ or in other words have limited liability which clearly distinguishes between both, and protects and reassures all shareholders that the maximum they could ever lose is their individual stock investments. Plus the business has continuity now, even if one of the owners passes away. 

• On the downside though, It wasn’t that easy to set-up and the legal process was far from simple. Thankfully, Julia, our resident legal expert, who we hired last month, helped us out. We needed to send the Registrar of Companies “the articles of association” which contained the rights and duties of the directors and “the memorandum of association” which contained details about the company such as names, objectives, number of shares of the directors and so on. Once sent, we had to wait for the Registrar to issue “a certificate of incorporation” to allow the company to start trading shares. 

• Another worry, is the fact that the shares can’t be sold or transferred to anyone else without the agreement of all the other shareholders, which is a bit inconvenient, especially if you need quick cash, and that’s the reason my Cousin Roger decided against investing, in fact this is probably the reason why we’re not permitted to offer shares to the general pubic.

• Further drawbacks include the fact that we have no more secrecy of accounts as we need to send them to the Registrar , who in turn publish them for the general public. 

• On a personal note, despite having a much greater income, I am much busier now, responsible for far more than before. We also have staff to front the business, so I have almost no contact with our customers which I miss terribly. I only get away once a year now, I mean if I, or indeed any of the directors, just took time off, we would jeopardise the whole company and break our contractual obligations to each other, as set out in the articles of association.

• We will continue to expand at a rate that keeps the business healthy and manageable, it is much more like a family now, each of us protecting each others investments for the greater good. Banks and suppliers all recognise our higher status and solid business practices so we are able to benefit somewhat from lower interest rates on loans as well as buy in bulk at discounted prices.

• All in all a very good move!!!!”

• Copy and paste the net stage into your doc and highlight all the pros in GREEN and all the cons in RED.

• A PUBLIC LIMITED COMPANY refers to a type of business organisation that is OWNED BY A MINIMUM OF ONE TO A MAXIMUM OF UNLIMITED SHAREHOLDERS, who are PERMITTED TO PUBLICLY TRADE THEIR SHARES, on the STOCK EXCHANGE.

• …well we had a staff of about 150 teachers and had diversified into University academic advising with a total of 20 counsellors, business was good!!!!! But it could do better!!

• When the government decided to offer licenses to the private sector, to establish a full-scale University we had an opportunity to expand further, but even though business was good there was no way we could finance that type of expansion unless we could sell more shares to more people. 

• The only way to do this was to ‘go public’, in other words become a public limited company. This way we’d have an unlimited number of shareholders, with no restrictions on their buying and selling , so we’d be able to raise a huge amount of capital funds.

• Apart from having no restrictions, this type of business organisation was very similar to the Private Limited Company in that we still had to complete costly and lengthy legal proceedings, though this time they were far more complex as we needed to get a listing on the stock exchange and produce and distribute thousands of copies of a prospectus that detailed our business operations to the public, so again no secrets. Anyway, this listing gave us a really high international status and so it was really easy to obtain capital finance from banks at low interest rates as well as get discounts due to our size.

• A further cost was the actual selling of the shares, which was expensive, as we needed to use a ‘merchant bank’ which charges high commission rates. 

• Thankfully, we still had limited liability and continuity after death, though now I and my former partners lost control of the business. This was because each shareholders has the right to vote and elect directors to control the company, and these aren’t always the major shareholders, therefore even though I still owned a large amount of shares I wasn’t elected at the Annual General Meeting (AGM), and had little influence on the company’s objectives.

• Of course, this led to many disagreements as the new Directors’ objectives and mine were sometimes different, but without any real power I have to rely on the management skill of the directors. Oh well!! at least I can sit back and take a holiday anytime I want now ;)

• Copy and paste the net stage into your doc and highlight all the pros in GREEN and all the cons in RED.

• A JOINT VENTURE refers to a type of business organisation that is formed when TWO OR MORE BUSINESSES START A PROJECT TOGETHER.

• "It's risky!...." was the CEO's immediate response. 

• Not if we do a JOINT VENTURE, that is join up with a China-based partner in building a group of BOUNOMIC international schools, that way we can share the costs and risks, and their local knowledge and familiarity with the market will mean we aren't going into the unknown.

• Of course we will have to share profits and there may be some disagreements related to direction and cultural differences but the growth in incomes and demand for western education in Asia is too big to ignore

• Read the above stage of Bob’s story then highlight all the pros in GREEN and all the cons in RED.

• FRANCHISING refer to a business model where a business owner (the FRANCHISOR) sells the rights to their business model, name, and logo to an independent entrepreneur (the FRANCHISEE).

• The joint ventures are proving successful but its costly and not that profitable in the short term, so how can we get the BOUNOMICS name worldwide faster without having to spend millions on building new tutorial centers? I decided to approach the CEO with another idea, 'FRANCHISNG'

• This way we can sell the rights to use our BOUNOMICS brand name (We will be called 'The FRANCHISER'), and the buyer (Who will be called 'The FRANCHISEE') not only has to pay for this license (This is called the 'FRANCHISE FEE'), but also for the building, rent, rates and staffing costs, saving us millions. Also we can use the money to offer more franchises, spreading our brand even further at a much cheaper cost, so our logo can be seen on nearly every street

• ...and why would they do this you may ask? Well our brand image is already so well-known, both domestically and now thanks to the joint ventures internationally, that they are guaranteed customers and have a much smaller chance of failure, and of course we will guarantee supply all the raw materials, tools, even the training of their staff and the layout of the centre and of course we will continue marketing and advertising the brand on their behalf saving them thousands on their marketing budgets, banks will definitely lend based on this so its win-win.

• "It's still risky!...." was the CEO's response. "if the franchise is located in a poor location or the franchisee gives a really bad service, then it can have a serious negative impact on our reputation and brand image!!!"

• Don't fret, we will only grant permission to use our branding when we have fully approved the location and the franchisee, even then we will instill our strict standards and regularly supervise operations so we can maintain our ethical standards. They will not be able to sell any unauthorized products and we make all promotional decisions. Winner!!!!!

• Read the above stage of Bob’s story then highlight all the pros to the FRANCHISOR in GREEN and all the cons to the FRANCHISOR in RED.

• pros to the FRANCHISEE in PURPLE and all the cons to the FRANCHISEE in PINK.

2- MARK QUESTIONS:-

• BMT State two types of business organisation (other than partnership).

• PCS State two features of a private sector business.

• ELTON Define ‘sole trader’.

• HASHIM Identify two features of a sole trader business.

• GOP What is meant by ‘public corporation’?

• SAMIRA What is meant by ‘franchise’?

• S&V What is meant by 'limited liability'?

• ADELE Identify two features of a sole trader.

• ASZ What is meant by ‘public limited company’?

• BG What is meant by ‘limited company’?

• GGB What is meant by ‘franchise’?

• BILL What is meant by ‘sole trader’?

• EDGE What is meant by ‘customer loyalty’?

• NUWAN What is meant by a ‘sole trader’?

• MOEEN & ALI Calculate the percentage (%) of businesses in country R which are partnerships.

• SI & RAMON What is meant by a ‘partnership’?

• RAMFORD What is meant by a ‘private limited company’?

• PYG What is meant by a ‘private limited company’?

• RJJ Define ‘limited liability’.

4-MARK QUESTIONS:-

• BMT Outline two disadvantages of BMT being a business partnership.

• DSY Outline two advantages to DSY of being a private limited company.

• KATE Identify and explain two possible reasons why Kate decided to start up her own business

• IBH Identify and explain two possible advantages to IBH of being a private limited company.

• BGN Identify and explain two advantages to BGN of being a private limited company.

• MOEEN & ALI Identify and explain two advantages to Moeen and Ali of forming a private limited company.

• WSS Identify and explain two advantages to WSS of selling its franchise.

• CHONS Identify and explain one advantage and one disadvantage of CHONS being a public limited company.

6-MARK QUESTIONS:

LOLA & RAUL Explain one advantage and one disadvantage to Lola and Raul of being in a business partnership.

FGH Identify and explain one advantage and one disadvantage to FGH of becoming a public limited company 

GEORGE Do you think George should buy a BunchesRUs franchise? Justify your answer.

PBG Identify and explain one advantage and one disadvantage to PBG of forming a joint venture.

FILLTUM Do you think selling more franchises is the best way for Filltum to expand? Justify your answer.

ALEX & RAUL Identify and explain two benefits to Alex of having a business partner.

LUIS Do you agree with Luis’s decision not to become a franchisee? Justify your answer.

ALL-ACTIVE Consider the advantages and disadvantages for All Active of being converted to a public limited company. Do you think All Active should become a public limited company? Justify your answer.

TEBO Do you think that buying a FIXIT franchise is the best way for Tebo to start his business? Justify your answer.

MANISHA Do you think Manisha should have a business partner? Justify your answer.

C&P Identify and explain one advantage and one disadvantage to Cory and Phoebe of being in a business partnership.

ZUMGO Identify and explain one advantage and one disadvantage of ZumGo being a business partnership.

8-MARK-QUESTIONS:

CC Explain two possible reasons why Aisha set up CC as a business partnership.

AD Explain two benefits and two limitations to a business of becoming a public limited company.

AH Identify and explain four characteristics that have made the two partners successful entrepreneurs.

AH Identify and explain one advantage and one disadvantage to AH of being a business partnership rather than a private limited company. 

GT Identify and explain two advantages and two disadvantages of GT being a public limited company. 

ChoChoc Identify and explain one advantage and one disadvantage to CC if it changes to a public limited company. 

GS Identify and explain one advantage and one disadvantage of GS being a partnership. 

BB Identify and explain one advantage and one disadvantage of BB being a private limited company. 

DDC Identify and explain one advantage and one disadvantage to Rosa and Eduardo of forming a business partnership.

GJ Identify and explain one advantage and one disadvantage to Ghaziz and Jasmin of being in a business partnership.

CampC Identify and explain one advantage and one disadvantage to CC of being a public limited company

12-MARK QUESTIONS:

GJ Consider the advantages and disadvantages of buying the Beautywise franchise. Do you think Gemma was right to buy the franchise? Justify your answer.

RR Consider the advantages and disadvantages of the following three types of business organisation. Recommend which type of business organization Richard should choose for RR as it expands. Justify your answer. 

BB Bethany is thinking of forming a business partnership. Explain the following three factors Bethany should consider when choosing a partner. Which factor do you think is most important? Justify your answer. 

CB Chris is thinking of starting his business as a partnership rather than as a sole trader or a private limited company. Explain why the following three factors are important to Chris when deciding on the type of business organisation to choose. Do you think Chris’s decision to start his business as a partnership is the right one? Justify your answer.