1.4 Choosing the Appropriate Legal Structure for the Business 1 S TARTING A B USINESS 1.4 L EGAL...

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1.4 Choosing the Appropriate Legal Structure for the Business 1 STARTING A BUSINESS 1.4 LEGAL STRUCTURE Talking rubbish! Who sells both a certain type of fish and the base of shoes? What do you get when you take half a dance partner and add half a premiership? If three’s a crowd what is two?

Transcript of 1.4 Choosing the Appropriate Legal Structure for the Business 1 S TARTING A B USINESS 1.4 L EGAL...

1.4 LEGAL STRUCTURE

1.4 Choosing the Appropriate Legal Structure for the Business

1 STARTING A BUSINESS

Talking rubbish!Who sells both a certain type of fish and the base of shoes?What do you get when you take half a dance partner and add half a premiership?If three’s a crowd what is two?

1.4 CHOOSING THE APPROPRIATE LEGAL STRUCTURE

In this topic you will learn about

Sole trader

Partnership

Private limited company (ltd)

1.4 LEGAL STRUCTURE

The problems of setting up in business!

1.4 LEGAL STRUCTURE

SOLE TRADERS

A sole trader is an individual who owns and runs their own business.

The simplest form of business.

A sole trader has unlimited liability - they are personally responsible for all debts run up by the business.

They could lose their home and all of their assets to pay off any debts that they are unable to pay.

Can you define asset and debt?

1.4 LEGAL STRUCTURE

SOLE TRADERSBENEFITS AND DISADVANTAGES OF BEING A

SOLE TRADER

Benefits Cheap and easy to

set up

All profits go to you!

Competitors can’t see your accounts

Highly motivated

You are the boss!

Drawbacks Unlimited liability

Limited finance

Difficult to find cover when ill

Few specialist skills – the owner has to do everything or ‘buy in’ expertise

A sole trader has to wear a number of ‘hats’ – a variety of jobs!

How many hats might a sole trader wear?

List all the different jobs a sole trader running a

newsagents may have to do.

CHOOSING THE APPROPRIATE LEGAL STRUCTURE

1.4 LEGAL STRUCTURE

Sarah has always dreamt of being her own boss and at the age of just 22 an opportunity arose. Patricia, the owner of the gift shop where Sarah worked, was due to retire and close the business that she had operated as a sole trader for over 40 years. Sarah wondered whether

she had the necessary skills to run the shop herself and finally plucked up the courage to talk to her boss about her buying the shop.

Question Time1. What is meant by the term ‘sole trader’. (2

marks)2. Explain one advantage of Patricia running the shop as a sole

trader. (2 marks)3. Explain one disadvantage of Patricia running the shop as a sole

trader. (2 marks)4. Identify and explain three skills Sarah would need to operate the

shop as a sole trader? (6 marks)

1.4 LEGAL STRUCTURE

PARTNERSHIPS

A partnership is where two or more people run the business

Each partner is equally responsible for debts incurred.

Each partner will take a share of the profits

Each partner usually shares in the decision making.

‘Sleeping’ partners invest in, but do not run, the business.

Partnerships have unlimited liability – can you define this term?

1.4 LEGAL STRUCTURE

GREAT PARTNERSHIPS

Can you name the partner?

1. Bonnie and

2. Romeo and

3. Laurel and

4. Napoleon and

5. French and

6. Holmes and

7. Morecambe and

What makes a good partnership?

What qualities would you look for in a

business partner?

1.4 LEGAL STRUCTURE

PARTNERSHIPSBENEFITS AND DISADVANTAGES OF BEING

A PARTNERSHIP

Benefits Risks and

responsibilities are shared

More specialist skills

Simple and flexible

Competitors can’t see your accounts

Easier to raise finance than a sole trader

Drawbacks Unlimited liability

Arguments can occur between partners

If a partner dies, resigns or goes bankrupt the partnership is dissolved

Trust becomes a significant element between partners

Partners draw up a legal document explaining how their partnership will work, this is called a ‘deed of partnership’.

PROVERBS

Can you work out what proverbs these abbreviations stand for?

APSIAPH Clue: when things aren’t going to plan do you ever chat to a friend

about it?

GMTA

Clue: you and I are thinking the same thing!

FSD

Clue: when is the last time you and a friend had the same silly idea?

TMCSTB

Clue: the soups burnt thanks to everyone involved1.4 LEGAL STRUCTURE

1.4 LEGAL STRUCTURE

PRIVATE LIMITED COMPANIES

Private Limited Companies have Ltd. after the company name.

They can have one or more members e.g. shareholders

They must have at least one director (at least 16 years old)

The shareholders are often family members and have a say in the running of the company

Can you define the word shareholder?

1.4 LEGAL STRUCTURE

PRIVATE LIMITED COMPANIES

Private Limited Companies exist in their own right.

The owners and the company are separate legal entities.

Therefore, the company’s finances are separate from the owner’s personal finances.

Shareholders are the owners of Private Limited Companies.

Shareholders have limited liability – they are not responsible for the company’s debts.

Shareholders can only lose the money that they have invested in the business in the form of shares.

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PRIVATE LIMITED COMPANIES

Incorporation

Private Limited Companies must be registered (Incorporated) at Companies House.

They must send to the Registrar of Companies the following:

1. A Memorandum of Association – name, registered office and what the company will do

2. Articles of Association – the rules of running the company

They must deliver to Companies House each year a true and fair set of accounts

1.4 LEGAL STRUCTURE

PRIVATE LIMITED COMPANIESBENEFITS AND DISADVANTAGES OF BEING A

PRIVATE LIMITED COMPANY

Benefits Limited Liability

Increased sources of finance

More expertise available

Difficult for hostile takeovers to occur

Drawbacks Competitors can see

financial information

Difficult to sell shares for individual shareholders – other shareholders have to agree

Greater legal constraints

Can’t sell shares to the general public

Why might one firm want to see the accounts of another?

30 SECOND CHALLENGE

302928272625242322212019181716151413121110987654321End

How many businesses can you name with ltd after its name?

TEAM CHALLENGE

Instructions

Split class into teams of 3

Each team should have 3 sheets of paper, preferably 3 different colours

Each sheet represents one type of ownership e.g. blue might be a sole trader, yellow a partnership and red a company

Each team member takes one sheet and writes down something about that type of ownership

Fold it over and pass on to next person

Keep doing this until the sheets have been passed to each person 3 times

Winning

Each sheet should now have 9 statements on it

Count up how many correct but different points have been made

The team with the most points wins

1.4 LEGAL STRUCTURE

CHOOSING THE APPROPRIATE LEGAL STRUCTURE

1.4 LEGAL STRUCTURE

Sarah has spoken to Patricia about her idea of buying the shop and was delighted by Patricia’s response. Patricia was thrilled to think the

business she had built up would continue to exist after her retirement and started the process of valuing the business. That night Sarah told

her boyfriend Bobby of her idea. Bobby had just been made redundant and offered to share the business with Sarah, thinking they could set it

up either as a partnership or a limited company.Question time1. What is meant by the term ‘partnership’? (2

marks)2. What is meant by the term ‘limited company’? (2 marks)3. Explain 2 advantages of Sarah accepting Bobby’s offer of sharing

the business. (4 marks)

4. Explain 2 drawbacks of Sarah accepting Bobby’s offer of sharing the business. (4 marks)

CHOOSING THE APPROPRIATE LEGAL STRUCTURE

1.4 LEGAL STRUCTURE

Sarah has arranged to meet with a small business adviser at her local business link. She has decided to take advice on the most appropriate

legal structure.

Question time1. The business adviser suggests that the most appropriate legal structure for Sarah would be a Limited Company. To what extent do you agree? Justify your answer. (9 marks)

Plan your answer!What should your structure be?

Review mark scheme

Over to you! Time to show off what you have learnt.

1.4 LEGAL STRUCTURE

THE CONSEQUENCES OF INCREASING THE NUMBER

AND RANGE OF STAKEHOLDERS

Sole Traders Partnerships

Ltd.

Can you define the term stakeholder?How does the legal structure of a business influence the number and

range of stakeholders?

NUMBER CIPHERS-LEGAL STRUCTURE

A=1, B=2, C=3 etc. You have two minutes to work out the following terms:

12 9 13 9 20 5 4 12 9 1 2 9 12 9 20 25

16 1 18 20 14 5 18 19 8 9 16

19 15 12 5 20 18 1 4 5 18

9 14 3 15 18 16 15 18 1 20 9 15 14

19 8 1 18 5 8 15 12 4 5 18

End

1.4 LEGAL STRUCTURE

SAY WHAT YOU SEE

1.4 LEGAL STRUCTURE

2 MINUTE TEST

State 2 advantages of being a sole trader

State 2 disadvantages of being a partnership

What 2 items must a private limited company provide to Companies House?

State 2 benefits of being a private limited company

State 2 stakeholders that will be affected by changing from a sole trader to a Ltd. company

End

1.4 LEGAL STRUCTURE