Unit 1.4

Making the Start-up Effective

10 Questions

The Marketing MixEnterprise

Downside

Unique Selling Point (USP)

Patent Market Research

Blue Skies Thinking

Innovation

Trademark

Customer Service

Sizing up the business

Businesses vary in size, from your small local corner shop or butchers…

…to multinational chains such as Tesco and McDonald’s.

The size of a business tends to be related to its type of ownership.

Small business ownershipThere are two types of small private business ownership:

the partnership – between two and twenty people sharing ownership of a business.

the sole trader or proprietor – the ‘one person’ business;

Sole TradersSole traders are the most common form of business.In Britain, 63% of all businesses are owned and run by one person. Sometimes the sole trader, or proprietor, will need to employ other people, but often they work alone.

Sole trader businesses typically include plumbers, florists, hairdressers, newsagents, electriciansand photographers.

The factors of production

Choosing a trading name

Sole traders can use their own name, or make up a trading name under which their business will be known. The name does not have to be registered, but it must be original.

What’s in a name?Do you know the origins of the names of these famous Britishcompanies?

Imagine you are setting up as a sole trader in one of these areas. Think of an original, suitable name for the business:

Plumbing

Cake-making

Picture framing

Hairdressing

Photography

Floristry

Voice Data Fone:Provision of voice and dataservices by mobile phone

His Master's Voice:The name was coined in 1899 as the title of a painting of a Jack Russell Terrier dog Nipper listening to a wind-up gramophone.

Tesco:Name after the founders:T E Stockwell andJack Cohen

A risky business?In law, there is no distinction between a sole trader and their business; they are regarded as one and the same thing. The sole trader is therefore personally responsible for all activities and debts of the business.

What do you think business debts might include?

Sole traders have what is known as unlimited liability.

This means that if their business fails, they would have to sell their personal belongings if necessary in order to pay off debts owed by the business.

A risky business?

capital borrowed from the bank

money owed to suppliers

employee wages.

If these debts are not repaid, the sole trader can be taken to court and made bankrupt.

Debts incurred in a business could include:

Small-business owners therefore stand the greatest risk by putting their own money into the business. However, if the business is a success, it is the sole owner who gets all the profits!

Sole trader advantages and disadvantages

Small Business OwnershipSole Trader1. A sole trader business is owned by ……..

2. Typical sole trader businesses include plumbers, …… and ……..

Advantages Disadvantages

They can make their own decisionsThey have to work long hoursThey keep all the profit they makeIt may be difficult to raise the money needed to start up They have unlimited liability: they are responsible for all debtsIt is easy to set up Business Name Origins

Fred has just been maderedundant. He has £10,000 of savings and decides to set up his own business.

He calculatesthis is not enoughto start-up hisown firm.

He sets up asa sole traderand borrows£5,000 fromhis bank.

He sets up “Removals R Us” and prospers for the first 5 years. Each year Fred keeps all the profithe makes.

Unlimited liability

Then the housing marketslumps and the firm startsto make a loss. Fred owes money to his suppliersthe suppliers want paying!

He has to close his business and sell all his business assets in order to pay the debts.

Unlimited liability

But, there still isn’t enough moneyto pay all the debts. Mr Grumpysupplier is still wanting his moneyand there isn’t any!

So what happens?

Fred’s family possessionsHAVE to be used to pay off the debts.

Mr Grumpy suppliercan then get paid!

But poor oldFred is backto squareone.

Unlimited liability

Unlimited Liability

Unlimited liability means that the owner of the business is responsible for paying the business debts.

Using the information provided, answer the following question:

What would happen if a sole trader could not pay the business debts?

• Business closes down• Business assets are sold• Money used to pay debts• If not enough, personal possessions used

Small business ownershipThere are two types of small private business ownership:

the partnership – between two and twenty people sharing ownership of a business.

Partners usually sign a “Deed of Partnership”

the sole trader or proprietor – the ‘one person’ business;

Partnership1. A partnership business is owned by ……..

2. To identify how the profit and debts are shared, partners usually sign a ………

Advantages Disadvantages

They share the decisionsThey have to share the profit they makeThe partners may disagree They have unlimited liabilityIt is easy to set upThey share the workload

Examination Questions

1. Alfie is a gardener and has run up debts of £50,000. In addition, he owes £10,000 to the bank. He invested £75,000 in his business. How much of the business debt is he responsible for paying?

a) £75,000b) £50,000c) £60,000d) £10,000 1 Mark

2. Would you recommend setting up as a sole trader business? Give reasons for your decision and discuss the advantages and disadvantages in your answer.

7 Marks

Large business typesAlong a typical high street there will be many different types of large businesses and organizations, including franchises, limited companies, co-operatives and businesses in the public sector.

Each of these large business types involve different responsibilities and involvement for the owners.

Limited companiesLimited companies are very different from partnerships and sole traders. With a sole trader, the owner is the business.

In contrast, limited companies are:

A limited company is therefore set up as a separate body from its owners.

owned by shareholders – people who invest money in shares of the company;

run by directors – people appointed by shareholders to control and make the strategic decisions for that company.

Limited liabilityOwners and shareholders in a limited company are protected by limited liability.

This means that they have limited responsibility for the business debts.

How is this different from the responsibilities in sole proprietorships and partnerships?

For this reason, setting up a limited company is relatively low risk.

They cannot lose any more money than they have invested in the company, and cannot have their personal possessions claimed in order to pay back debts that are owed.

Setting up a limited companyUnlike sole proprietorships and partnerships, which aresimple to set up, limited companies must produce paperwork and follow certain procedures when setting up.

In addition, a limited company must produce:a Memorandum of Association, which states who they are, where they are based and what they do.

Articles of Association – an internal ‘rulebook’, which sets out how the business will be run.

All limited companies in the UK have to register with the Registrar of Companies at Companies House. In return, they are issued with a Certificate of Incorporation. This is an official document which shows that the company has come into existence.

Documentation

Types of limited companiesHave you ever seen the letters ‘Ltd’ or ‘PLC’ after a company’s name? Do you know what they stand for?

‘PLC’ after a company’s name tells you it is public limitedcompany.

‘Ltd’ or ‘Limited’ after a company’s name tells you it is a private limited company.

There are two types of limited company:

Types of limited companiesThe difference between a private and public limited companylies in the ownership of their shares.

A private limited company can start up with as little as £1 in share capital, whereas a public limited company must have at least £50,000 worth of shares to begin trading.

Shares in public limited companies are sold on the London Stock Exchange and can be bought by members of the general public.

In a private limited company there is restricted ownership. Shares in the company can only be sold if all the shareholders agree to it.

Private limited companies

Why might people setting up a business decide to become a private limited company rather than

form a partnership?

Private limited companies tend to be smaller than public limited companies. The main shareholders in a private limited company are often also the directors of the company.

Private limited companies typically include recruitment consultants, building firms, estate agents and caterers. Many private limited companies are family-run businesses.

Limited Companies1.Limited Companies are owned by ………………...2.The shareholders elect a …………….. to run the

company.3.Every year the directors hold an …………….. 4.Limited companies can be private (Ltd) or public

(PLC).5.A private limited company usually sells shares to

………………………..6.A public limited company sells shares on the Stock

Exchange to the ………………….

Annual General Meeting ShareholdersFriends and family General publicBoard of Directors

Fred has just been maderedundant. He has £10,000 of savings and decides to set up his own company.

He calculatesthis is not enoughto start-up hisown firm.

He persuadeshis friends to invest in hiscompany. Theyall buy £5,000of shares each.

He sets up “Removals Ltd” and prospers for the first 5 years. Eachyear the shareholders receive ashare of the profit. Fred gets 2/5 andhis friends get 1/5 each.

Then the housing marketslumps and the firm startsto make a loss. The companyowes money to their suppliersthe suppliers want paying!

He has to sell all his company’sassets in order to pay the debts

But, there still isn’t enough moneyto pay all the debts. Mr Grumpysupplier is still wanting his moneyand there isn’t any!

So what happens?

Fred’s family possessionsare safe – they cannotbe used to pay offthe debts.

Mr Grumpy supplierdoesn’t get paid!

Limited LiabilityLimited liability means that the owner of the

business is NOT responsible for paying the business debts. The most they can lose is their investment.

Using the information provided, answer the following question:What would happen if a private limited

company could not pay the business debts?

• Business closes down• Business assets are sold• Money used to pay debts• If not enough, debts are not paid

Private limited companies: pros and cons

Starter Activity …Sort the statements into three columns:

Sole TraderPartnership Limited Company

Complete the business ownership table and stick it in your exercise book

Unlimited Liability and Limited Liability

• If a business cannot pay their debts, the business goes into administration and the business assets are sold in order to pay the debts

• If there is not enough money to pay the debts, a sole trader or a partnership must use their own savings to pay the debts (unlimited liability)

• Shareholders in a company have limited liability and do not lose their personal possession

Example: Sole TraderUnlimited Liability

• £220,000 is owed by the sole trader

• Assets are sold and £50,000 is available to pay the business debts

• Sole trader will still owe £170,000

• The sole trader’s personal possessions must be sold to pay the £170,000 debt

Example: Limited CompanyLimited Liability

• £220,000 is owed by the limited company

• Assets are sold and £50,000 is available to pay the business debts

• The company will still owe £170,000

• The shareholders’ personal possessions cannot be sold to pay the debts

Being a shareholder in a limited company reduces the risk

compared to being a sole trader or partnership.

You could lose your investment, but you will never lose your

personal possessions.

Unsecured Bank Loan£10,000

People that might be owed money by the company

Secured Bank Loan eg Mortgage£200,000

Utility Bills£2,000

Supplier£8,000

Shareholders

Assets are sold and£50,000 is available topay the debts. Whogets paid?

Who gets paid first?

• Secured bank loan

• Unsecured bank loan

• Utility bills: gas, electric, water

• Suppliers

• Shareholders (if there is any money left)

Page 98 and 106: Multiple choice questions

Page 99: Read the case study and answer questions 1-3.

10 Questions

ShareholderOne person

2-20 partners

Unlimited liabilityLtd

Limited Liability

PLC

Board of Directors

AGM (Annual General Meeting)

Dividend

Legal Start-up Issues and TaxLesson Objectives

• Understand the need to create a suitable name

• Understand the need for a new business to keep careful records

• Understand the implications for a small business: VAT, income tax, national insurance and corporation tax

Business Names

• The name should be different from any other business

• The name should promote the business• A limited company must register their

name and the name must be unique• A private limited company must put “Ltd”

after their name – this is a warning to other businesses that the shareholders have limited liability.

Sole Traders:

Limited Companies:

Create a positiveimpression …

Think of an InnovativeBusiness Name:

1. A Chinese restaurant

2. A plumbing company

3. A mobile disco

4. A travel agency

5. A butchers

6. A hairdressers/barbers

Your group has 3 minutes to think of a name

When you set up a new

business, you must register with HMRC (Her Majesty’s

Revenue & Customs).

Keeping RecordsLegally a business must register their business with

HMRC (Her Majesty’s Revenue & Customs) and must keep the following records:

• Details of revenue from customers• Details of all business costs

A business must pay tax and how much they pay depends on:

• The amount of sales each year• Whether or not employees work for the

business• Whether the business is a sole trader or limited

company

Taxes are used to fund the Government owned Public Sector

Public Sector Services

• Education• The National Health Service• Defence: Army, Navy, Air

Force

• Police Force• Prisons• Roads• Payment of social security

benefits

Examples of Benefits• Unemployment benefit/Job Seeker’s Allowance• Child benefit• Pensions• Incapacity benefit (disabled)• Statutory sick pay (paid when you are ill)

These are paid for through the National Insurance Contributions system – deductions are made from your wage/salary each month. Self employed people must also make National Insurance Contributions.

The Public Sector and Benefits

They are paid for by collecting taxes, eg:

Petrol Tax

Stamp Duty

Tax on alcohol

Tax on cigarettesand cigars

Where taxpayers’ money is Where taxpayers’ money is spentspent

Match the amount to the heading1.NHS

2.Defence

3.Social security payments

4.Education

5.Law and order

£153 billion

£96 billion£31 billion£32 billion £71 billion

Where taxpayers’ money is spentWhere taxpayers’ money is spent

1.NHS

2.Defence

3.Social security payments

4.Education

5.Law and order

£96 billion

£32 billion

£153 billion

£71 billion

£31 billion

Where the taxes come fromWhere the taxes come from

Match the amount to the heading

1. VAT

2. National Insurance

3. Corporation Tax

4. Excise duties (cigarettes and alcohol)

5. Income Tax

£146 billion

£48 billion£89 billion£76 billion£40 billion

Where the taxes come fromWhere the taxes come from

1.VAT

2.National Insurance

3.Corporation Tax

4.Excise Duties

5.Income Tax

£76 billion

£89 billion

£48 billion

£40 billion

£146 billion

TaxIncome Tax• Sole traders and partners pay income tax on their

earnings• All employees must have income tax deducted under the

PAYE (Pay as you Earn) schemeCorporation Tax• Limited companies must pay corporation tax on the

profit they makeVAT (Value Added Tax)• Businesses must register for VAT if their sales are

more than £68k a year• They must then charge 20% VAT on their pricesNational Insurance Contributions• Most employees must pay NICs to the government –

this pays for the benefit system• Employers must make a contribution for every

employee they have working for them

Mrs Wright’s Salary

Total Pay £4,079

Tax £694National Insurance Contribution £307Teacher’s Pension Contribution £261

£1,262

Net Pay £2,817

Revision: Legal and Tax Issues

Which ONE is a tax on earnings?Which is added on the price of goods and services?Which is a tax on profits and paid by companies?Which ONE pays for the benefits system?Which ONE his when 20% is added to the price of

goods and servicesWhich TWO taxes are deducted from Mrs Wright’s pay?Which ONE uses the PAYE system?Which ONE is a tax on company profits?Which ONE is a tax on income/earnings paid by sole

traders and partnerships? Which ONE do sole traders, partnerships and limited

companies have to pay if their sales turnover is more than £68,000?

Which THREE are paid by Mrs Wright?

Legal Issues: RevisionIncome TaxA tax deducted from employee’s wages. It is also

paid by sole traders and partnerships.VATA tax added on to the price of most goods and

services.National Insurance ContributionsA deduction from employee’s wages. It is used to help pay for the benefits system.Corporation TaxA tax on profits paid by all limited companies.The money collect from taxes is used to pay for the

public sector and the benefits system.

Complete the questions on pages 102 and 103

P. 103: Lara York(Royal Kare Computers)

Question 1:Explain the type of tax and what the money is used

for. Explain who will have to pay this tax in the business.

Question 2: “Analyse”:Explain the advantages and disadvantages:Why is accurate record keeping essential?What are the disadvantages for Lara?Question 3:Give your opinion, then justify your opinion –

explain all the advantages and disadvantages.

Recruitment, Training and Motivating Staff

• Staff may need to be recruited

• Small businesses must appoint the most suitable staff

• Staff must be trained to do their job properly

• Staff must be motivated – they must want to work well for the business at all times

Watch the DVD:“Talking Heads”

Rank the 5/6 people in order of who you think will get the job.

What stages are involved in recruiting a new member of staff?

The Recruitment Process

Person

Job Description and Person Specification

• Job Description– Detailed explanation of roles and responsibilities of

the post advertised– Refers to post available rather than person

• Person Specification– Sets out qualifications, skills, experience and

personal attributes a successful candidate should possess

– Vital tool in assessing suitability of job applicants– Refers to person rather than post

In pairs:

Produce a Job Description and Person Specification for a Business Studies Teacher

Job Description

Work they have to do every day

Work they have to do at home

Person Specification

Qualifications required

Characteristics required

Experience required

Business Studies TeacherBusiness Studies TeacherJob DescriptionJob Description

• Plans lesson• Marks students’ work• Attends parents evenings• Registers students every day• Cover absent staff• Prepare students for examinations• Take part in extra curricular activities• Take on the role of a form tutor

Business Studies TeacherBusiness Studies TeacherPerson SpecificationPerson Specification

Essential• Teaching qualification• Degree in Business Studies• Ability to teach GCSE and A

Level• Good communicator• Good discipline• Well organised• Excellent attendance and

punctuality• Gets on with pupils• Good ICT skills

Desirable• Further degree• Ability to teach ICT or

another subject• Ability to offer extra

curricular activities• Has a driving licence• Experience of teaching

vocational subjects• Can inspire pupils• Would organise and help

with trips

JobDescription

Sky TV

Documents used when applying for jobs

Application Form (produced by the business)

• Personal details• Work experienceCV (Curriculum Vitae) (produced by the applicant)

• Personal details • Work experience• Names of two refereesLetter of Application (produced by the applicant)

• Details of why you want the job

Short Listing and Interviews

• Applicants need to be assessed for their suitability for the job

• Employers usually interview approximately 6 people

• Interviews can be: face-to-face involve a test involve role play

Laws Protecting Applicants

Businesses cannot discriminate against people because of their:

• Gender• Disability• Race • Age • Sexual persuasion

Training StaffInduction• Training an employee when they start a new job.

Eg tour of the building, meeting staff, explanation of equipment, health & safety procedures.

On-the-job Training• Training that takes place in the workplace eg work

shadowing. Eg mentoring, coaching.

Off-the-job Training• Training that takes place outside the workplace eg

college course. Eg college course, conference at a hotel.

Headed Notepaper:Your address, telephonenumber, e mail, mobile phone number etc

You start here

Format forLetter of

Application

Test your Knowledge

The tax that consumers have to pay on goods and services is called:

a) Income tax

b) Corporation tax

c) VAT

d) National Insurance Contributions

Test your Knowledge

The TWO taxes that employees have deducted from their wage/salary are:

a) Income tax

b) Corporation tax

c) VAT

d) National Insurance Contributions

Test Your Knowledge

What is the name of the tax that companies have to pay based on the profit they make?

a) Income tax

b) Corporation tax

c) VAT

d) National Insurance Contributions

Test your Knowledge

When a business is responsible for paying all their debts, they may have to sell their personal possessions to pay the business debts. This is called:

a) Unlimited liability

b) Limited liability

c) Liquidation

d) Bank loan

Test your Knowledge

The owners of a private limited company are called:

a) Sole traders

b) Stakeholders

c) Directors

d) Shareholders

Test your Knowledge

A private limited company must, by law, do which TWO of the following:

a) Hold an AGM (Annual General Meeting)

b) Put their prices up

c) Take out a bank loan

d) Produce an annual report for their shareholders

Test your Knowledge

The TWO most likely sources of finance for a sole trader setting up their business would be:

a) Venture capital

b) Bank loan

c) Retained profit

d) Using own savings