Business ownership

ACTIVITY!Working with the people around you, list as

many of the shops at the local St Helena shopping strip as you can. You have three minutes!

Sole TradersMost small businesses are what we call

Sole Traders.

Sole Trader: An individual ,who may or may not employ other people, who owns and operates their own business.

Sole traders have unlimited liability.

Take a guess: what might unlimited liability mean?

Unlimited LiabilityUnlimited Liability: The liability of the

owner of the business for all of the obligations of the business.

When you are subjected to unlimited liability, your personal assets (home, car, belongings ect.) can be seized in order to pay any debts incurred by the business.

You are personally liable for everything!

Starting upGenerally, sole traders have little money, and therefore

they must spend a lot of their own time and money trying to indentify a ‘gap in the market’.

Those who do not research the market before setting up their business are more likely to see their business fail.

Why might it be important to identify a ‘gap in the market’?

Why might neglecting to do so potentially end in failure?

What if you don’t have the cash?Sole trader’s often have to obtain the money

they need to finance their business venture from a variety of sources.

The most common source is from their own personal savings, or from the money they might have received from their previous employment. Eg: Redundancy payments.

If they don’t have enough money, however, they must turn to the bank.

What if you don’t have the cash?If a sole trader does not have the money to

start up their business they must apply for a bank loan. This however, is not always easy!

Why might it be hard to get a bank loan when opening up a new business?

Bank LoansA new business means High Risk and banks

may be hesitant to help you out until your business is proven to be successful and profitable.

You may get a small loan ( with a high interest rate), an overdraft, and a business banking account but not much more assistance than that.

Venture CapitalistsAnother common means for new business

attracting investment is through venture capitalists.

Venture capitalists are investors who are prepared to accept higher levels of risk than high street banks and will invest money in a wide variety of different ‘high risk – high reward’ style new businesses. They will ask for a percentage of your profits and may even help you set up in the market.

Running your business.Just because you are a sole trader does not

mean you can’t employ other people to work for you. It just means that you are in charge and you are responsible.

As a sole trader you still make all of the big decisions for your company and keep all of the profits ( after costs).

Remember: what are the two different types of costs in business?

Running your businessA sole trader can operate under their own

name but must register their business if they adopt a business trading name.

Sole traders must pay tax on the profits made by the business.

Problems with Sole TradingLimited ideas and skills

•No one to share new ideas with.•No one with different skill to utilise.

Long hours and limited holidays•As the owner, you do all the work!•The business stops when you stop.

Unlimited Liability•Legally, you are the business.•If it fails, you pay the price.

Benefits of Sole TradingCost •Relatively cheap and easy to start a business (depending on what it is).

Money •As a sole trader you get to keep all the profits.

Privacy •Unlike other large businesses and companies, you can keep your financial records private.

Questions:1. Write down the meaning of Sole trader.

2. What does unlimited liability mean?

3. Pick one advantage and one disadvantage of sole trading and explain in detail.

PartnershipAs the name suggests, a partnership is when

two or more people own a business together. A partnership can have between 2 and 20 owners.

While as a sole trader you can make all of your decisions independently, in a partnership all of your business decisions must be shared.

This can sometimes cause tension and problems.

Partnership In a partnership all profits are shared

equally between those involved.

Just like sole traders, partnerships also maintain unlimited liability, though liability is shared between all owners.

A common example of partnerships are solicitors, vets, or medical practices.

PartnershipDespite these negatives, a partnership still offers

considerable benefits for potential business owners.

A partner may bring new ideas and skills to the table that you may not have yourself.

A partner brings their own capital (money) to the business.

With shared ownership it will be much easier to take time off work.

What happens if the partners don’t agree?When setting up a partnership, most business

owners will choose to create a Deed of Partnership. This document is not compulsory but when it is signed it is legally binding

A Deed of Partnership lays out what each partner is responsible for; how much capital they have invested in the business; how much of the profit they are entitled to have a share of and how much of the debt they are liable for. It will not stop arguments but it helps to resolve disputes between partners.

Thinking Question:1. If you were starting a business would you

become a sole trader or enter into a partnership? Give evidence to support your answer.

Complete the following paragraph by filling in the blanks.  A ________ ____________ business only has one owner unlike

a _____________________ which has two or more owners. One of the main advantages of being a sole trader is that the owner of the business gets to keep all of the ________ but they also are responsible for paying all of the businesses __________ as well! In a partnership, the ________ of the business is shared between the partners but this can create arguments. Both sole traders and partnerships also have ______________ liability. One of the main sources of finance for a sole trader is to seek out a ___________ _____________ as banks like to avoid risk.

Questions:1. Explain the main differences between a sole

trader and a partnership.

2. Sole trader John Smith discovers that he lacks the level of finance needed to keep the business running successfully. Explain the options that are open to him to avoid bankruptcy. Make sure that you give at least ONE advantage and ONE disadvantage to each option and reach a conclusion about which is the better decision for him.

CompaniesAs a business grows and needs additional

capital for expansion, business owners may choose to form a corporation, also called a company.

A corporation is separate from the owners of the business and it can purchase assets, operate a bank account or be sued it its own right.

What is a company?In many ways a company is similar to a sole

trader or partnership, except that it exists as a separate legal entity from the owners (who are called shareholders).

This means that in most circumstances, personal assets of the owners cannot be touched to pay for the debts of the company.

Companies can either be proprietary (private) or public.

Types of companies

Proprietary (private) PublicDesigned for a small number of

shareholders; membership limited to 50.

Limited opportunity for members of the public to purchase shares.

Right of members to trasfer their shares in limited,

Shares not made available to public.

Often grow from family businessMust have words ‘Proprietary

Limited’ ( Pty Ltd) after their name.

Must have at least 5 members, no maximum limit

General public are able to purchase shares easily

Easy transfer of shares, they may be bought and sold readily .

Funds can be raised by direct invitation to members of the public

Must have word ‘Limited’ (ltd) after business name.

CompaniesThe Corporations Act governs the operations of

companies. A corporation operates independently of its owners and shareholders.

The owners have limited liability because their financial contribution to the company is limited to the face value of their shares.

Limited liability means that owners cannot be held personally accountable for debts owed by the company. Their personal possessions cannot be used as payment.

Questions:1. What does ‘Ltd’ stand for? What does it

mean?

2. What does ‘Pty Ltd’ stand for? What does it mean?

3. Why might you choose to get create a company instead of becoming a partnership or sole trader?