Business Studies: Sole Traders

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Questions and Answers

There are three legal regulations which must be followed, what are they?

The owner must register with, and send annual accounts to, the Government Tax Office. (correct)

The name of the business is significant. The name must be registered with the Registrar of Business Names. (correct)

In some industries, the sole trader must observe laws, these include health and safety laws and obtaining a licence to sell alcohol or operate a taxi. (correct)

What are three advantages and disadvantages to sole trades of running their own business?

Advantages:

There are few legal regulations when setting up the business.
The owner is their own boss, having complete control over their business.
They have the freedom to choose their own holidays, hours of work, prices to be charged and whom to employ.
They are close to the customer, have the personal satisfaction of knowing their regular customers and can respond quickly to their needs and demands.
They keep all profits after paying tax (incentive to work hard).
They do not have to disclose information about their business to anyone else, the Tax Office aside.

Disadvantages:

Sole traders have no one to discuss business matters with.
They have unlimited liability which means that they are fully responsible for all the debt of the business. If they can't pay, their creditors can force them to sell all of their possessions to pay off the debts.
Sole traders may not have enough money to expand their business, as their sources of financing are limited.
If the sole trader is ill, there will be no one to take control of the business. They can't pass the business to family members because when they die, it will legally not exist anymore. This is because there is no continuity of the business.

Mike offered his friend Dave the chance to become a partner in his Taxi business. They prepared a written partnership agreement. What five main points would be important to include in the agreement which would benefit both parties?

The five main points of a partnership agreement are the following:

The amount of capital invested by each partner in the business.
The tasks to be undertaken by each partner.
The way the profits will be shared.
How long the partnership will last.
The arrangements for absence, retirement and how new partners could be admitted.

Name three types of advantages that have become clear to Mike.

Mike finds the following three advantages to having a partner: <ul> <li>More capital can be invested into the business with both partners' savings.</li> <li>The responsibilities of running the business are shared, which gives each partner specialized skills and experience to contribute to the success of the business.</li> <li>Both partners are motivated to work hard because they share profits and losses.</li> </ul> Signup and view all the answers

Name three types of disadvantages that have Dave worried.

Dave became worried with the following three disadvantages: <ul> <li>The partners do not have limited liability. This means if the business fails, creditors can force partners to sell their personal property to pay off the debts.</li> <li>The business does not have a separate legal identity. This means that if one of the partners dies, the partnership ends.</li> <li>There is the possibility of a partner being inefficient or dishonest, which could cost the other partners money.</li> </ul> Signup and view all the answers

Mike and Dave discuss these points with their solicitor. They agree partnerships were very suitable in certain situations as sole traders, but they both are clear that they want to expand the business further but wanted to reduce personal risk. They would like to protect their own possessions from business creditors in event of failure. The solicitor advised them to consider forming a private limited company. She explains. She explained that this type of business organisation would be very different from a partnership and would have its own benefits and drawbacks. Mike and Dave asked the solicitor to list three benefits of forming a private limited company.

The three benefits of forming a private limited company are the following: <ul> <li>They can sell shares to a large number of people raising large sums of capital to invest in the business and enabling it to expand more rapidly.</li> <li>All shareholders have limited liability, meaning they are not personally liable for the company's debts and creditors cannot force them to sell their possessions to pay off the debts.</li> <li>Mike and Dave can keep control of the company, as long as they do not sell too many shares to other people. This means that they can continue to manage the company and make decisions about the business.</li> </ul> Signup and view all the answers

The legal adviser and solicitor were keen for Mike and Dave to know exactly what they would be committed to if they formed a private limited company, so they also listed three disadvantages.

The legal adviser pointed out the following three disadvantages of forming a private limited company: <ul> <li>There are many legal matters that need to be dealt with before a company can be formed, including sending the 'Articles of Association' and the 'Memorandum of Association'.</li> <li>The documents must be sent to the registrar of companies, which need to be prepared correctly to reassure shareholders about the structure and purpose of the company.</li> <li>The company's accounts are less secret. Each year, the latest accounts must be sent to the Registrar of Companies and they can be inspected by members of the public.</li> </ul> Signup and view all the answers

Define 'laissez-faire leadership style'.

A laissez-faire leadership style is when a leader adopts a hands-off approach to management. They give their employees a high level of autonomy and minimal supervision, only intervening by request or when there's a problem. Signup and view all the answers

Where does ‘laissez-faire' come from and what does it mean?

The term “laissez-faire” is French and it means “allow to do”. Signup and view all the answers

Identify two roles of a manager.

The roles of a manager are: <ul> <li>They allow their employees to be primary decision-makers</li> <li>They give their team support, guidance, consultation and training when needed but trust them to handle tasks and projects.</li> </ul> Signup and view all the answers

Outline one external cost and one external benefit Millie's business activities might create.

The external cost of Millie's business is the potential negative impact on the environment and local communities created by producing oil. This includes the potential cost of oil spills, health risks, injuries, and illness. The external benefit of Millie's business could be that the company invests in education and training related to the oil industry. This benefits society because of the knowledge and production that is created. Signup and view all the answers

Explain two methods of IT-based communication Millie might use with its employees.

The two methods of IT-based communication that Millie uses are: <ul> <li>Using two-way radios (wireless intercoms) for real-time communication, providing immediate feedback and coordination of tasks, ultimately enhancing safety and productivity.</li> <li>Satellite communication for working off-shore, which is a reliable option that can transmit data over long distances and to remote locations. However, it can be expensive and vulnerable in bad weather.</li> </ul> Signup and view all the answers

Explain three ways a pressure group might try to influence business decisions. Which way do you think is likely to be most effective? Justify your answer.

Pressure groups might try to influence business decisions in the following ways: <ul> <li>Many try to influence businesses to behave more ethically.</li> <li>They might use media coverage to create bad publicity for a company.</li> <li>Pressure groups might encourage customers to stop buying a company's product.</li> </ul> Boycotting is likely to be the most effective method because it can have a significant impact on a company's revenue. Customers who choose not to buy a product or service can directly impact a company's sales and profitability, forcing them to reconsider their policies or practices. Signup and view all the answers

Study Notes

Exam Instructions

Insert details (date, class year, nickname) in the provided spaces.
Use black or dark blue ballpoint pen. HB pencils allowed for notes, diagrams or graphs only.
Do not use erasable pens or correction fluid. Correct any mistakes by neatly crossing them out.
Rubber/eraser allowed for removing pencil marks.
Highlighters allowed.
Dictionaries are not allowed.

Sole Traders

Sole traders are common business organizations owned and operated by one person.
Legal regulations include registration with the Government Tax Office, registration of business names with the relevant authority, and adherence to industry-specific laws (e.g., health and safety, licensing for alcohol sales or taxis).

Advantages of Sole Traders

Few legal regulations for setting up.
Complete control over the business.
Freedom in choosing holidays, working hours, pricing, and employees.
Close customer contact and quick responses.
Keeping all profits after tax.

Disadvantages of Sole Traders

Responsibility for all business debts (unlimited liability).
No one to discuss business matters.
Limited access to outside finance.
Business ceases upon the owner's death.
Difficulties in expanding the business due to limited capital.

Partnerships

Partnerships involve two or more people owning and running a business together.
A written agreement is recommended to define terms like capital contributions, tasks, and profit-sharing.

Partnership Agreement Points

Capital invested by each partner.
Tasks allocated to each partner.
Profit-sharing arrangements.
Duration of the partnership.
Procedures for absence, retirement, or new partners.

Advantages of Partnerships Over Sole Traders

Increased capital due to multiple partners.
Shared responsibilities, allowing specialization.
Increased motivation due to shared profit.
More expertise and skills through specialization.

Disadvantages of Partnerships

Unlimited liability for partners' debts.
Potential for disagreements due to shared decision-making.
End of partnership upon death or withdrawal of a partner.
Potential for loss of money if one partner is inefficient or dishonest.

Private Limited Companies

Benefits include:
- Shares can be sold to raise significant capital.
- Limited liability for shareholders.
- Continued operations upon death.
Disadvantages include:
- Legal compliance issues (e.g., articles of association, memorandum of association).
- Increased accounting transparency due to required submissions.

Laissez-faire Leadership

A hands-off approach emphasizing employee autonomy.
Management intervenes only when necessary for problem-solving and support.
Involves allowing employees high levels of autonomy in their work, with minimal supervision by management.

Managerial Roles

Delegation empowers employees to make primary decisions.
Managers provide guidance, consultation, and training for employee tasks and projects.

External Costs and Benefits

One external cost for a business like Millie's (an oil company) is negative environmental impacts like oil spills and harm to local communities.
One external benefit is education; knowledge and skills gained by people improve society.

Communication Methods

Companies like Millie's may use two-way radios for real-time internal communication.
Communication using satellite systems enables effective communication for remote locations and businesses operating offshore.

Pressure Group Influence

Pressure groups try to influence business decisions by gaining media exposure, promoting boycotts, or advocating for ethical behaviors.
Gaining media attention, creating bad publicity campaigns or boycotts by influencing customers' decisions are all ways pressure groups can influence business.

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Description

This quiz covers the essential concepts of sole traders, including their legal regulations and advantages. Understand the implications of operating as a sole trader and the benefits associated with this type of business organization. Test your knowledge on the key elements that define sole traders.