1. Explain 2 differences between a sole 1. Explain 2 differences between a sole trader and partnershiptrader and partnership

Sole trader is entirely owned by one person; partnership Sole trader is entirely owned by one person; partnership by 2-20.by 2-20.

Risks, workload and responsibilities are shared in a Risks, workload and responsibilities are shared in a partnershippartnership

More specialisation in a partnership than a sole traderMore specialisation in a partnership than a sole trader More access to capital in a partnership than a sole More access to capital in a partnership than a sole

trader.trader.

2. Explain the importance of establishing a 2. Explain the importance of establishing a separate legal identity to separate the business separate legal identity to separate the business

from the individual ownerfrom the individual owner

The value is that potential liabilities rest with the The value is that potential liabilities rest with the company (the separate legal entity) and cannot company (the separate legal entity) and cannot be passed on to the owners (the shareholders); be passed on to the owners (the shareholders); consequently the owners enjoy limited liabilityconsequently the owners enjoy limited liability

3. You can start a business today. All you 3. You can start a business today. All you have to do is tell the Inland Revenue (the have to do is tell the Inland Revenue (the

taxman). Outline 2 risks of starting a taxman). Outline 2 risks of starting a business this way. (4)business this way. (4)

You will have unlimited liability because you are You will have unlimited liability because you are technically operating as a sole tradertechnically operating as a sole trader

It sounds too impulsive, business start-up is risky, It sounds too impulsive, business start-up is risky, so it should have some careful so it should have some careful preparation/research before rushing in.preparation/research before rushing in.

4. Briefly discuss whether each of the following 4. Briefly discuss whether each of the following businesses should start as a sole trader, partnership pr businesses should start as a sole trader, partnership pr

a private limited companya private limited company

a)a) This should be started as a private limited company to This should be started as a private limited company to create a full guarantee of no personal losses beyond create a full guarantee of no personal losses beyond Claire’s £40,000; but many people would start this as a Claire’s £40,000; but many people would start this as a sole trader, because the risks of default are very low and sole trader, because the risks of default are very low and everything seems to be within Claire’s control.everything seems to be within Claire’s control.

b)b) It could become a partnership, but the risk profile is so It could become a partnership, but the risk profile is so high that it would be foolish not to make this a limited high that it would be foolish not to make this a limited company; 67% of capital is borrowed (compared with company; 67% of capital is borrowed (compared with 20% for Claire Wells) and big ambition (number one in 20% for Claire Wells) and big ambition (number one in Sheffield) implies the need for extra inputs of capital in Sheffield) implies the need for extra inputs of capital in the futurethe future

5. Explain the possible risks to a growing business 5. Explain the possible risks to a growing business of making the jump from a private limited company of making the jump from a private limited company

to ‘going public’, then floating its shares on the to ‘going public’, then floating its shares on the stock market. (5)stock market. (5)

The sudden influx of cash from the float The sudden influx of cash from the float coincides with a sudden increase in external coincides with a sudden increase in external scrutiny and pressure; with the media and City scrutiny and pressure; with the media and City analysts sniffing around, the pressure is on to analysts sniffing around, the pressure is on to invest this cash quickly (many of the building invest this cash quickly (many of the building societies that ‘floated’ in the 1980’s and 1990’s societies that ‘floated’ in the 1980’s and 1990’s made staggering mistakes with their early made staggering mistakes with their early investments – the cash was burning a hole in investments – the cash was burning a hole in their pockets).their pockets).

Rapid growth is always risky; with a sudden injection Rapid growth is always risky; with a sudden injection of a lot of cash, businesses often attempt a great of a lot of cash, businesses often attempt a great leap forward, perhaps by making their first takeover leap forward, perhaps by making their first takeover bid for another company; as most takeovers fail, this bid for another company; as most takeovers fail, this is certainly risky.is certainly risky.

Lose control of who becomes a shareholder in the Lose control of who becomes a shareholder in the business and if not careful the company could be business and if not careful the company could be taken over.taken over.

Diseconomies of scale – the business could grow Diseconomies of scale – the business could grow too large too quickly creating problems with too large too quickly creating problems with communication and ordering. communication and ordering.

It may be difficult to raise the funds necessary to It may be difficult to raise the funds necessary to become a public limited companybecome a public limited company

More paper work and formalities.More paper work and formalities.

6. In what way may the type of business 6. In what way may the type of business organisation affect the image of the organisation affect the image of the

business? (2)business? (2)

It sounds more established/formal to have It sounds more established/formal to have a Ltd after the company name rather than a Ltd after the company name rather than nothing; and makes the company seem nothing; and makes the company seem much bigger if it is TIB PLC than TIB Ltd.much bigger if it is TIB PLC than TIB Ltd.

Sole traders are usually thought of as Sole traders are usually thought of as small service based businesses which small service based businesses which remain small.remain small.