Revision NotesExam QuestionsPast Papers
GCSEBusinessEdexcelRevision Notes1. Investigating Small Business1.4 Making the Business EffectiveThe Options for Start Up & Small Businesses

The Options for Start Up & Small Businesses (Edexcel GCSE Business)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Limited & Unlimited Liability

  • When an entrepreneur starts a business, they need to consider what kind of legal structure they want for their business

  • Sole traders and partnerships offer no legal protection to the owners in that the business assets and the owner's personal assets are viewed as being the same (unlimited liability)

  • The other forms of business ownership offer limited liability in which the assets of the owners are considered to be separate from those of the business

A Comparison of Unlimited & Limited Liability

Liability

Description

Implications

Unlimited liability

  • The owners are fully responsible for all debts owed by the business

  • Owners are also legally responsible for any unlawful acts committed by those connected to the business

  • There is no legal distinction between owners with unlimited liability and the business

  • As a result, these business owners may have to use their own  personal assets to pay debts or legal fees

  • E.g. a sole proprietor may need to sell their home to pay  creditors if their business fails

Limited liability

  • Owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails

  • Shareholders are not responsible for business debts

  • In most cases, the shareholders cannot be held responsible for unlawful acts committed by those connected with the business

  • Companies are  incorporated and owners are considered a separate legal entity to the business 

  • This means that if a company fails, the owners would lose their investment (shares) but would not have to use their assets to meet additional debts or legal fees

  • E.g. In 2018 construction company Carillion entered liquidation and the shareholders lost their investments

Types of Business Ownership for Start-ups

  • When an entrepreneur starts a business, they will often start operating as a sole trader

  • Over time, they may change the form of business to gain more funding or provide more security for the owners by providing limited liability

1-4-1-types-of-business-ownership-for-start-ups

The different types of business structures available to the owners

  • Three of the most common forms of business at start up are sole traders, partnerships and private limited (Ltd) companies

  • Each one of these forms has various advantages and disadvantages associated with the structure

An Explanation of Sole Traders, Partnerships and Private Ltd Companies

Form

Explanation

Advantage

Disadvantage

Sole Trader

  • A business that has a single owner (although they may still hire employees)

  • Easy and inexpensive to set up

  • The owner has complete control over the business

  • All profits belong to the owner

  • Simple tax arrangements

  • Unlimited liability, meaning the owner is personally responsible for any debts the business incurs

  • Limited access to finance and capital

  • Limited skill set of the owner/entrepreneur

Partnership

  • Two or more people join together to form a business

  • Good examples of this type of business include lawyers and accountants

  • Easy to set up and inexpensive

  • Shared responsibilities and decision-making

  • More skills and knowledge are available

  • Increased access to finance and capital

  • Unlimited liability

  • Potential for disputes between partners

  • Profits are often shared equally, regardless of the contribution

  • Difficult to transfer ownership

Private Limited Company (Ltd)

  • The ownership of the business is broken down into a specified number of shares

  • These shares can be sold by the owner, usually to friends and family or to venture capitalists

  • Decision-making often rests with the person appointed to run the company, often called the Managing Director or CEO

  • Limited liability, meaning the owners are not personally responsible for the company's debts

  • Access to greater finance and capital

  • Easier to transfer ownership

  • Can have a professional image and reputation

  • More expensive and time-consuming to set up

  • More complex legal requirements and regulations than sole traders

  • Annual financial reporting and auditing are required

  • Shareholders have little control over the company as the founder usually imposes their agenda

Franchising

  • Franchising is a business model where an individual (franchisee) buys the rights to operate a business model, use its branding and software tools and receive support from a larger company (franchisor) in exchange for an initial lump sum plus ongoing fees

  • The franchisee operates the business under the franchisor's established system and receives training, marketing support, and ongoing assistance

    • E.g's include Domino's Pizza, KFC, Burger King 

      1-4-1---franchising

Some of the many food franchises available

The Advantages & Disadvantages of Owning a Franchise

Advantages

Disadvantages

  • Centralised advertising: A ready made, well recognised brand name, which will be promoted centrally by the Franchisor

    • E.g.  Dominoes sponsored 'The Simpsons for many years

  • Training: The Franchisor provides training such as how to make pizzas properly to ensure the quality and consistency of the brand

  • Supplies are provided: The Franchisor provides equipment and supplies so that the product will be the same, regardless of where it was purchased

  • Exclusive location: The Franchisor provides an exclusive area or market to sell to

    • They will not create any more franchises in that area

  •  Support services:  Advice, training, use of software systems and problem solving are ongoing and the Franchisor may also provide the Franchisee with loans, insurance, etc

  • Overhead/Startup Cost: This is a fixed sum paid at the start of the franchise for the right to use the business name and resources

  • Royalty costs:  Usually paid quarterly and varies according to the level of sales. Often equal to 5 - 10 % of sales turnover

  • Cost of supplies: The Franchisor may sell material or equipment to the Franchisee at inflated prices

  • Quality control management: If the Franchisee does not produce the good/service to the required standard set by the Franchisor, the Franchise rights can be removed from them

Examiner Tips and Tricks

A franchise is not a form of business ownership; it is an alternative to starting up a brand new business from scratch.

In most cases, Franchisors require businesses to operate as private limited companies, as this ownership type is considered to have more stability than sole traders or partnerships.

Last updated:

You've read 0 of your 5 free revision notes this week

Sign up now. It’s free!

Join the 100,000+ Students that ❤️ Save My Exams

the (exam) results speak for themselves:

    Test yourself

    Did this page help you?

    Previous:Sources of Business FinanceNext:Business Location
    Author
    Reviewer
    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Jenna Quinn

    Author: Jenna Quinn

    Expertise: Head of New Subjects

    Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.