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H BM - BUSINESS ACTIVITY 1

Types of business organisation

Organisations fall into 3 different categories:

Private

Voluntary

State


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Private Sector

Private sector plays an important role

creates goods and services

employs millions of people

varies in size from Shell and ICI to corner shops

driving force for change and improvement


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Sole Trader

Most common form of business ownership:

no complicated legal requirements

decisions can be made quickly

close contact with customers and employees

all profits retained/high satisfaction


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Sole Trader

Some disadvantages:

all decisions are made by owner

long hours

unlimited liability

sourcing finance


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Partnership

2-20 people in a partnership

partners can share skills/knowledge

organisation could provide 24/7 service

easier to raise finance


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Partnership

Some disadvantages

disputes

unlimited liability (except sleeping partner)

difficult to raise large amount of capital

decision making process is slower


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Partnership Deed

Legally binding agreement

covers

share of profits, salary, drawings, duties andresponsibilities, cessation of partnership, death

of partner.


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OwnershipQuestion

Explain the advantages and disadvantages of

being a sole trader. (6)

Distinguish between operating as a sole traderand a partnership. (4)

INTERNET RESEARCH

PARTNERSHIPS WHAT IS A LIMITED PARNTERSHIP

WHAT HAPPENS WHEN A PARTNER DIES

FIND THE BEST RATE OF INTEREST FOR NEW BUSINESS

START-UPS


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Solution

Distinguish between operating as a sole trader and a partnership.

A sole trader is run by one person whereas apartnership is run by 2 20.

A sole trader is able to make quick decisions whereas ina partnership decision making is slower as all partnersare consulted.

A partnership can raise more capital than a sole trader

as all the partners introduce capital.A sole trader may work longer hours whereas in apartnership the workload is shared. It may be possibleto trade 24/7 whereas this would be impossible in a soletrader.


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The Company

owned by shareholders - shareholders unlikely to run the company

a separate legal body

shareholders have limited liability

company has to be registered with Companies House

Articles of Association and Memorandum of Association must be

provided


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The capital of a company

authorised share capital - 200,000

issued share capital - 80,000

paid-up share capital -40,000


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Private company (Ltd)

Usually small

shareholders 2+

shares not traded on Stock Exchange

Shareholders are invited - may be family or friends

may find it easier to raise finance that unlimited liabilityorganisations


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Public company (plc)shares bought and sold in stock exchange

large amounts of capital can be raised quickly

costly to have shares quoted on SE

may not raise all capital required if SE has a bad day

original shareholders can lose control


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Private Sector Questions

Read pages 37 42 then complete the following

questions in your jotter:

Question 1 (page 38)

Question 2 (page 39)

Summary questions (page 45)

Orange case study (page 46)


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Franchises

Growth area - increasingly popular form ofownership

Hiring out of a good idea

A franchise grants permission to sell a productand trade under a certain name within a definedarea


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FRANCHISE

a business arrangement where one firmpays for the right to trade under the

name of anotherFRANCHISER - the business which sells the right totrade using its name to others, eg, McDonalds, Hertz

FRANCHISEE - the person who buys the right to tradeusing the name of the mother company


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franchise

Franchiser sells the idea

Franchisee pays for the franchise

Capital has to be found by franchiseeMaterials/supplies must be bought from franchiser

Percentage of profit/turnover returned to franchiser

Franchisee has a local monopoly and is tradingunder a well-known name


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Why buy a franchise?existing, established product therefore

more chance of success

cheaper market research and promotional

costsmay receive help and training from

franchiser

lower start up costs


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Why sell a franchise?

quicker growth - can cover wider

geographical area more quickly

without having to buy premises or paystaff

provides funds - franchisee must buy

franchise and pay part of its profits tofranchisor


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DISADVANTAGES

reputation of the company/brand

depends upon how good the franchisees

are

franchisees are bound by contract which

restricts what they do

part ofprofits/turnovermust be paid to

franchiser


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Why so popular?

96% of franchises are still in profit after 5 years.(Only 66%of small firms survive the first 3 years)

There are some 718 business format franchises in the UKcomprising over 35,000 franchisees all with a variety offormer careers.

Average investment of 42,700

We all know that McDonalds and Thornton's Confectionaryare franchised, but there are many others.


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Franchising - Question

Explain the costs and benefits of franchising for:

the franchisor

The franchisee (8)

To answer you must ID the cost or benefit then

explain why it is a cost or a benefit.


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Franchising - QuestionExplain the costs and benefits of franchising for:

the franchisor

The franchisee (8)

To answer you must ID the cost or benefit then explain why it is a cost or a

cost or benefit.

Answer:A benefit of franchising for the franchiser isthe potential to expand

quickly. They can expand quickly because the franchiser can sell

licences over a wide geographical area without having to manage the

individual branches. (1 mark)

A cost to the franchiseris the reputation of the company is outwith theircontrol. This is becausethe success of the business is dependent on the

skills and expertise of individual franchisees (1 marks)

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