Section A: Key terms and recall
Define the term 'sole trader'. [2 marks]
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A sole trader is a business owned and managed by one person. They have unlimited liability, meaning they are personally responsible for all the debts of the business.
What is a partnership? [2 marks]
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A partnership is a business owned by two or more people who share the profits and liabilities.
What is a private limited company? [2 marks]
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A private limited company is a type of business where the liability of the members is limited to the amount they have invested. It cannot sell shares to the public.
What is a public limited company? [2 marks]
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A public limited company is a type of business that can sell shares to the public and has limited liability. It must have at least two shareholders and can raise capital by issuing shares on a stock exchange.
What is a franchise? [2 marks]
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A franchise is a business model where the owner (franchisor) licenses their business name, logo, and operating methods to an independent operator (franchisee) in exchange for fees and royalties.
Section B: Applying your knowledge
Sarah wants to start a small bakery. She will be the only owner and will manage the business herself. What type of business organisation is this, and what are the main features? [3 marks]
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This is a sole trader. The main features are that Sarah will have full control over the business, she will keep all the profits, but she will also have unlimited liability, meaning she is personally responsible for all the debts of the business.
John and Mike want to start a graphic design business together. They will share the profits and liabilities. What type of business organisation is this, and what are the main features? [3 marks]
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This is a partnership. The main features are that John and Mike will share the profits and liabilities, they will have more capital than a sole trader, and they can combine their skills and expertise.
A new technology company wants to raise capital by selling shares to the public. What type of business organisation is this, and what are the main features? [3 marks]
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This is a public limited company. The main features are that it can sell shares to the public, it has limited liability, and it must have at least two shareholders.
A fast-food chain wants to expand its operations by allowing independent operators to use its brand name and operating methods in exchange for fees and royalties. What type of business organisation is this, and what are the main features? [3 marks]
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This is a franchise. The main features are that the fast-food chain (franchisor) licenses its brand name, logo, and operating methods to independent operators (franchisees) in exchange for fees and royalties.
Section C: Explain and analyse
Explain the differences between unincorporated businesses and limited companies. [4 marks]
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Unincorporated businesses, such as sole traders and partnerships, are not legally separate from their owners. The owners have unlimited liability, meaning they are personally responsible for all the debts of the business. Limited companies, such as private and public limited companies, are legally separate from their owners. The liability of the members is limited to the amount they have invested.
Analyse the concepts of risk, ownership, and limited liability in different forms of business organisation. [6 marks]
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In a sole trader, the owner has full control over the business but also bears all the risk and liability. In a partnership, the partners share the risk and liability, but they also share the profits. In a private limited company, the owners (shareholders) have limited liability, meaning they are not personally responsible for the debts of the business. The directors manage the company and bear the risk of decision-making. In a public limited company, the shareholders have limited liability, and the company can raise capital by selling shares to the public. The directors manage the company and bear the risk of decision-making. In a franchise, the franchisor bears the risk of the brand and operating methods, while the franchisee bears the risk of running the business.
Section D: Challenge
Recommend and justify a suitable form of business organisation to owners/management in a given situation. [5 marks]
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A suitable form of business organisation for this situation would be a private limited company. The friends can start the business with limited capital and share the profits and liabilities. They can also have a clear management structure with directors and shareholders. In the future, if they need to raise more capital, they can issue more shares to new investors. This form of business organisation provides limited liability, which means the friends are not personally responsible for the debts of the business.