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1-4-1-The-Options-For-Start-Up-And-Small-Businesses

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Exam code:1BS0

Limited and unlimited liability

When an entrepreneur starts a business, they need to consider what kind of legal structure they want for their business
Sole traders and partnerships offer no legal protection to the owners in that the business assets and the owner’s personal assets are viewed as being the same (unlimited liability)
The other forms of business ownership offer limited liability in which the assets of the owners are considered to be separate from those of the business

A comparison of unlimited and limited liability

Liability	Description	Implications
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

Liability

Description

Implications

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

Types of business ownership for start-ups

When an entrepreneur starts a business, they will often start operating as a sole trader
Over time, they may change the form of business to gain more funding or provide more security for the owners by providing limited liability

Legal forms of business

Diagram showing forms of business: sole trader, partnership, franchise, private ltd company, and public ltd company, centred around a main box. — **The different forms of business structures available to owners**

Three of the most common forms of business at start up are sole traders, partnerships and private limited (Ltd) companies
Each one of these forms has various advantages and disadvantages associated with the structure

Comparison of sole traders, partnerships and private limited companies

Form	Explanation	Advantages	Disadvantages
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

Franchising

Franchising is a business model where an individual (franchisee) buys the rights to operate a business model, use its branding and software tools and receive support from a larger company (franchisor) in exchange for an initial lump sum plus ongoing fees, known as royalties
The franchisee operates the business under the franchisor’s established system and receives training, marketing support, and ongoing assistance
- E.g’s include Domino’s Pizza, KFC, Burger King

Examples of well-known food franchise businesses

Logos of various brands including Togo's, Arby's, Five Guys, Wendy's, McDonald's, Burger King, KFC, Dunkin' Donuts, Subway and more — **Some of the many food franchises available include McDonalds, KFC and Subway**

Advantages and disadvantages of owning a franchise

Advantages	Disadvantages
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

Advantages

Disadvantages

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

Examiner Tips and Tricks

A franchise is not a form of business ownership; it is an alternative to starting up a brand new business from scratch.

In most cases, franchisors require businesses to operate as private limited companies, as this ownership type is considered to have more stability than sole traders or partnerships.

Business GCES EDEXCEL