Business Structures: Sole Trader and Partnership

Sole Trader

• A sole trader business is owned and operated by one person.
• Advantages of a sole trader business:
  • Easy to set up
  • Owner makes all decisions
  • Owner keeps all profits
  • Flexible
• Disadvantages of a sole trader business:
  • Unlimited liability (owner may have to use personal assets to pay business debts)
  • Limited capital
  • Less continuity after owner leaves business
  • High workload

Partnership

• A partnership is a business owned and operated by 2-20 people who work together to make a profit.
• A partnership agreement should be in place outlining:
  • Capital contribution of each partner
  • Profit sharing agreements
  • Rules for adding new partners
• Advantages of a partnership:
  • Easier to start than other legal business structures
  • More access to capital
• Disadvantages of a partnership:
  • Conflict can arise between partners
  • All partners are responsible for the actions of each other

Franchise

• A franchise is a business model that allows another operator to trade under the name, logo, and processes of an existing business, in exchange for a fee called royalty.
• The business with the name is the franchisor; the operator is the franchisee.
• Advantages of franchising for franchisees:
  • Lower risk than starting a new business
  • Lower start-up costs thanks to support from franchisor
  • Established brand image and reputation
  • Provided training and support
• Disadvantages of franchising for franchisees:
  • Profits are shared with franchisor
  • Less freedom in decision-making
  • High initial investment
• Advantages of franchising for franchisors:
  • Easy expansion
  • Lower cost of growth
  • Lower risk of failure
• Disadvantages of franchising for franchisors:
  • Cost of providing training and support
  • Franchisee actions could damage brand reputation
  • Future competition from franchisees

Limited Companies

• A limited company is a legally separate entity from its owners (shareholders).
• There are two types:
  • Private limited companies:
    • Typically small to medium-sized businesses
    • Owned by 2 to 50 shareholders
    • Shares can only be sold to family and friends
    • Advantages:
      • More access to capital
      • Limited liability (shareholders only lose invested capital, not personal assets)
      • More status and perceived legitimacy
      • Directors can be appointed to manage the business
    • Disadvantages:
      • More restrictions to start and close down
      • Profits are shared as dividends
      • Minimum capital is required
      • Can't sell shares to the public
  • Public limited companies:
    • Large companies that can sell shares to the public
    • Advantages:
      • More access to capital
      • Limited liability
      • High status
    • Disadvantages:
      • High start-up costs
      • Profits must be shared as dividends
      • Must publish financial information
      • Can be difficult to control

Multinational Companies (MNCs)

• A large private-sector company that operates in more than two countries
• Features of MNCs
  • Large-scale production
  • Up-to-date technology
  • High sales and profits
  • Extensive mass media advertising
  • Highly skilled workforce
  • Economies of scale
• Benefits of MNCs:
  • Increases sales and profits
  • Reduces trade barriers
  • Increased brand recognition
  • Economies of scale
• Limitations of MNCs:
  • High production costs
  • Difficult to manage operations in multiple countries
  • Competition from other multinational corporations

Public Corporations

• Owned and controlled by the government
• Features:
  • Ownership by the government or state
  • Government provides capital
  • Created by law
  • Main objective is to provide public services
• Reasons for public ownership:
  • Provide essential goods and services at reasonable prices
  • Create job opportunities
  • Provide public services (e.g., healthcare, education)
  • Maintain control of strategic industries (e.g., energy, transportation)
  • Supply goods and services private sector would not provide
• Reasons against public ownership:
  • Potential for inefficiency
  • Political influence
  • Difficult to control
  • Cost to the government

Factors of Production

• Resources used by businesses to produce goods and services.
• Resources:
  • Land: All natural resources (minerals, water, land)
  • Labour: All human effort involved in production
  • Capital: Man-made resources used in production (machinery, buildings, tools)
  • Enterprise: Individuals who organize the other factors of production to create business ventures

Specialization

• Producing a narrow range of products or services
• Advantages:
  • Higher output
  • Saves time
  • Less wastage
• Disadvantages:
  • Potential for boredom
  • Increased risk of job-related repetitive strain injuries

Capital Intensive Production

• Uses more machinery and equipment than labor for production
• Advantages:
  • Higher output
  • Consistency in production
  • Efficient
  • Easier to handle large-scale production
• Disadvantages:
  • Machinery breakdown
  • High capital investment
  • Less flexible

Labour Intensive Production

• Uses more human labor than machinery
• Advantages:
  • Cheaper
  • More flexible
  • Creative
• Disadvantages:
  • Need for breaks and holidays
  • More difficult to manage a large workforce
  • Human errors can occur