IGCSE BUSINESS STUDIES

TYPES OF BUSINESS ORGANISATION

Aims:
1. Define sole trader and partnership
2. Identify the main features of a sole trader and a partnership
3. Distinguish between incorporated and unincorporated businesses
4. Define limited and unlimited liability
5. Identify key reasons why businesses fail

Prep: Revise
STARTER:
TYPES OF BUSINESSES
The difference between incorporated and unincorporated
businesses
Unincorporated Incorporated (companies)
Sole Traders and partnerships Private limited companies (shares
sold to friends and family) and public
limited companies (shares sold on
the stock exchange)
Owned by sole trader or partners Owned by shareholders
Owners have unlimited liability – if Shareholders have limited liability –
the business fails they can lose their if the business fails they only lose
house/car etc. to pay any bills their investment
Does not have a separate legal Has a separate legal identity to the
identity to the owners in the eyes of owners in the eyes of the law
the law
Pay income tax (same as someone Pay corporation tax (tax on profits)
who earns wages)
SOLE TRADER
A sole trader is a type business that is run and owned by one person
Key Features
• Simplest form of business enterprise
• The business is ‘unincorporated’ this means it does not have a separate legal identity to its owner
• Financed by owners savings/bank loan/business grant (if available)
• May employ staff
• Needs small sum of capital to start up - no permission needed, no forms to fill in
• Some business expertise needed
• The individual takes the risk and is rewarded with profit/or faced with the loss
• The owner has ‘unlimited liability’ (because it is unincorporated) this means that the owner is personally liable for all business debts
and can be forced to sell their personal possessions to pay these
•
• https://www.yell.com/s/sole+traders-taunton.html
• https://youtu.be/QDxjwdMTFE4
Should We Be a Sole Trader?
Yes! No!
1 Cheap and easy to set up 1 Unlimited liability
2 Usually small, so less money 2 Money can be difficult to
3 is needed obtain
3
4
Owner has all the control Costs per unit are usually
5 (makes all of the decisions) 4 higher
6 Prices are usually higher
Owners can keep all the 5
7 profits Business ends when owner
Business accounts can be dies
6
kept private
No one to help if you are sick
7
Quick decision-making or want to go on holiday
Can respond to the needs of Owners must work long hours
the customers quickly (flexible)
PARTNERSHIPS
A group of two to twenty partners who set up business to provide a good or service, with the aim of making profit.
Key Features
• Generally same features and key legal points as a sole trader except more owners involved.
• Rules of the partnership are often described in a legal document called a Deed of Partnership. This contains:
• Who the partners are
• Amount of capital each partner should provide
• How profits or losses should be shared amongst the partners
• How many votes each partner has (usually based on proportion of capital provided)
• Rules on how to take on new partners
• How the partnership is brought to an end, or what happens if a partner leaves/dies
• Extension: A partnership may include ‘sleeping partners’ these are people who invest in the business but are not involved in
any decision making. They have ‘limited liability’.
 Should We Be a Partnership?
Yes! No!
1 1
Easy to set up – but a Deed of Unlimited liability (except
Partnership is advisable sleeping partners)
2
2 Usually small, so not much money Less control for individuals
3
is needed
4 Legal costs of drawing up a
3 Deed of Partnership
Responsibilities can be shared –
more skills than a sole trader 5
Possible arguments
4 Decisions can be shared and new 6
ideas discussed Shared profits
5 7 Decision by one partner is
Can be run as a family business Still hard
legally to raise
binding onmoney
all the opthers
6
Accounts can be kept private
7
Money comes from partners, so more money
can be raised than a sole trader
WHY DO SOLE TRADERS & PARTNERSHIPS OFTEN
SUCCEED?

• Can offer specialist services to customers

• Can be sensitive to the needs of customers – since they are closer to the
customer and can react more quickly
• Can cater for the needs of local people – a small business in a local area
can build up a following in the community due to trust
• Might only be a small market that bigger businesses are not interested in
(do not see as profitable)
WHY MIGHT A SOLE TRADER OR PARTNERSHIP
(UNINCORPORATED) CHANGE TO A LIMITED
COMPANY (INCORPORATED)?
• Limited liability
• Can raise more finance by selling shares
• Finances are still private – do not have to be published
• Might be able to share ideas with other shareholders

• BUT
• They will have to share the profit (pay dividends to other shareholders)
• They may lose some control as shareholders all own part of the business
• It might take longer to make decisions if all shareholders are involved
 CHOOSE THE MOST APPROPRIATE LEGAL
STRUCTURE:
• 1. You want to be in complete control.
• 2. You want to reduce your risk.
• 3. You want to share the workload.
• 4. You will need lots of start-up finance.
• 5. You don’t want to share the profits.
• 6. You will have shareholders.
• 7. You don’t want to lose control.
• 8. You might lose all your personal possessions if the business fails.
• 9. You want to share the decision making.
• 10. You won’t lose your personal possessions if the business fails.
• 11. You don’t want the hassle of legal paperwork.
• 12. Some of your profits have to go to your shareholders.
• Complete Types of Business Sheet
EXAM QUESTION
TO FINISH

• Q: Why would a
partnership
change to be a
private limited
company?
Questions

Answer the following questions:

1. Who is in control of the business and who keeps all the
profits in a sole trader?
2. What might be the main source of finance apart from
the owner’s savings for a partnership?
3. If you went to a bank manager for a bank loan, what
would you be expected to bring with you?
4. State one advantage and one disadvantage of running
your business as a sole trader, as a partnership and as
a limited company